Choiceone Financial Services Inc 10-Q for FY2021 Q3
Choiceone Financial Services Inc (COFS)
About this 10-Q
Choiceone Financial Services Inc filed this 10-Q on November 8, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $2.75M
- up 10.4% from $2.49M a year earlier
- Net income
- $5.75M
- up 50.1% from net income of $3.83M a year earlier
- Diluted EPS
- $0.75
- up 53.1% from $0.49 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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| | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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Commission File Number:
ChoiceOne Financial Services, Inc.
(Exact Name of Registrant as Specified in its Charter)
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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.
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).
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 ☐ |
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| | Smaller reporting company |
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| Emerging growth company |
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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
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
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As of October 31, 2021, the Registrant had outstanding
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||
| (Unaudited) | (Audited) | |||||||
| Assets | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Time deposits in other financial institutions | ||||||||
| Cash and cash equivalents | ||||||||
| Equity securities at fair value (Note 2) | ||||||||
| Securities available for sale (Note 2) | ||||||||
| Federal Home Loan Bank stock | ||||||||
| Federal Reserve Bank stock | ||||||||
| Loans held for sale | ||||||||
| Loans to other financial institutions | ||||||||
| Loans (Note 3) | ||||||||
| Allowance for loan losses (Note 3) | ( | ) | ( | ) | ||||
| Loans, net | ||||||||
| Premises and equipment, net | ||||||||
| Other real estate owned, net | ||||||||
| Cash value of life insurance policies | ||||||||
| Goodwill | ||||||||
| Core deposit intangible | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities | ||||||||
| Deposits – noninterest-bearing | $ | $ | ||||||
| Deposits – interest-bearing | ||||||||
| Total deposits | ||||||||
| Borrowings | ||||||||
| Subordinated debentures | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Shareholders' Equity | ||||||||
| Preferred stock; shares authorized: ; shares outstanding: | ||||||||
| Common stock and paid-in capital, par value; shares authorized: ; shares outstanding: at September 30, 2021 and at December 31, 2020 | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive income, net | ||||||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
See accompanying notes to interim consolidated financial statements.
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
| Three Months Ended |
Nine Months Ended |
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| (Dollars in thousands, except per share data) |
September 30, |
September 30, |
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| 2021 |
2020 |
2021 |
2020 |
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| Interest income |
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| Loans, including fees |
$ | $ | $ | $ | ||||||||||||
| Securities: |
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| Taxable |
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| Tax exempt |
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| Other |
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| Total interest income |
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| Interest expense |
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| Deposits |
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| Advances from Federal Home Loan Bank |
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| Other |
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| Total interest expense |
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| Net interest income |
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| Provision for loan losses |
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| Net interest income after provision for loan losses |
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| Noninterest income |
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| Customer service charges |
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| Insurance and investment commissions |
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| Gains on sales of loans |
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| Net gains (losses) on sales of securities |
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| Earnings on life insurance policies |
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| Trust income |
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| Change in market value of equity securities |
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| Other |
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| Total noninterest income |
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| Noninterest expense |
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| Salaries and benefits |
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| Occupancy and equipment |
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| Data processing |
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| Professional fees |
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| Supplies and postage |
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| Advertising and promotional |
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| Intangible amortization |
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| FDIC insurance |
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| Other |
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| Total noninterest expense |
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| Income before income tax |
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| Income tax expense |
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| Net income |
$ | $ | $ | $ | ||||||||||||
| Basic earnings per share (Note 4) |
$ | $ | $ | $ | ||||||||||||
| Diluted earnings per share (Note 4) |
$ | $ | $ | $ | ||||||||||||
| Dividends declared per share |
$ | $ | $ | $ | ||||||||||||
See accompanying notes to interim consolidated financial statements.
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| (Dollars in thousands) | September 30, | September 30, | ||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Other comprehensive income: | ||||||||||||||||
| Changes in net unrealized gains on investment securities available for sale, net of tax (benefit)/expense of ($) and $ for the three months ended September 30, 2021 and September 30, 2020, respectively. Changes in net unrealized gains (losses) on investment securities available for sale, net of tax (benefit)/expense of ($) and $ for the nine months ended September 30, 2021 and September 30, 2020, respectively. | ( | ) | ( | ) | ||||||||||||
| Reclassification adjustment for realized (gain) loss on sale of investment securities available for sale included in net income, net of tax expense (benefit) of $ and ($) for the three months ended September 30, 2021 and September 30, 2020, respectively. Reclassification adjustment for realized gain on sale of investment securities available for sale included in net income, net of tax expense of $ and $ for the nine months ended September 30, 2021 and September 30, 2020, respectively. | ( | ) | ( | ) | ||||||||||||
| Other comprehensive income (loss), net of tax | ( | ) | ( | ) | ||||||||||||
| Comprehensive income | $ | $ | $ | $ | ||||||||||||
See accompanying notes to interim consolidated financial statements.
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
For the three months ended September 30,
| Accumulated | ||||||||||||||||||||
| Common | Other | |||||||||||||||||||
| Stock and | Comprehensive | |||||||||||||||||||
| Number of | Paid in | Retained | Income/(Loss), | |||||||||||||||||
| (Dollars in thousands, except per share data) | Shares | Capital | Earnings | Net | Total | |||||||||||||||
| Balance, July 1, 2020 | $ | $ | $ | $ | ||||||||||||||||
| Net income | ||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||
| Shares issued | ||||||||||||||||||||
| Effect of employee stock purchases | ||||||||||||||||||||
| Stock options exercised and issued (1) | ||||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Merger with Community Shores Bank Corporation | ||||||||||||||||||||
| Cash dividends declared ($ per share) | ( | ) | ( | ) | ||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | $ | ||||||||||||||||
| Balance, July 1, 2021 | $ | $ | $ | $ | ||||||||||||||||
| Net income | ||||||||||||||||||||
| Other comprehensive income | ( | ) | ( | ) | ||||||||||||||||
| Shares issued | ||||||||||||||||||||
| Effect of employee stock purchases | ||||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Shares repurchased | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Cash dividends declared ($ per share) | ( | ) | ( | ) | ||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | $ | ||||||||||||||||
(1) The amount shown represents the number of shares issued upon exercise of options, net of shares withheld for payment of certain taxes.
See accompanying notes to interim consolidated financial statements.
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
For the nine months ended September 30,
| Accumulated | ||||||||||||||||||||
| Common | Other | |||||||||||||||||||
| Stock and | Comprehensive | |||||||||||||||||||
| Number of | Paid in | Retained | Income/(Loss), | |||||||||||||||||
| (Dollars in thousands, except per share data) | Shares | Capital | Earnings | Net | Total | |||||||||||||||
| Balance, January 1, 2020 | $ | $ | $ | $ | ||||||||||||||||
| Net income | ||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||
| Shares issued | ||||||||||||||||||||
| Effect of employee stock purchases | ||||||||||||||||||||
| Stock options exercised and issued (1) | ||||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Restricted stock units issued | ||||||||||||||||||||
| Merger with Community Shores Bank Corporation | ||||||||||||||||||||
| Cash dividends declared ($ per share) | ( | ) | ( | ) | ||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | $ | ||||||||||||||||
| Balance, January 1, 2021 | $ | $ | $ | $ | ||||||||||||||||
| Net income | ||||||||||||||||||||
| Other comprehensive income | ( | ) | ( | ) | ||||||||||||||||
| Shares issued | ||||||||||||||||||||
| Effect of employee stock purchases | ||||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Shares repurchased | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Cash dividends declared ($ per share) | ( | ) | ( | ) | ||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | $ | ||||||||||||||||
(1) The amount shown represents the number of shares issued upon exercise of options, net of shares withheld for payment of certain taxes.
See accompanying notes to interim consolidated financial statements.
ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| Nine Months Ended | ||||||||
| (Dollars in thousands) | September 30, | |||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash from operating activities: | ||||||||
| Provision for loan losses | ||||||||
| Depreciation | ||||||||
| Amortization | ||||||||
| Compensation expense on employee and director stock purchases, stock options, and restricted stock units | ||||||||
| Net gains on sales of securities | ( | ) | ( | ) | ||||
| Net change in market value of equity securities | ( | ) | ||||||
| Gains on sales of loans | ( | ) | ( | ) | ||||
| Loans originated for sale | ( | ) | ( | ) | ||||
| Proceeds from loan sales | ||||||||
| Earnings on bank-owned life insurance | ( | ) | ( | ) | ||||
| (Gains)/losses on sales of other real estate owned | ( | ) | ||||||
| Proceeds from sales of other real estate owned | ||||||||
| Costs capitalized to other real estate | ( | ) | ||||||
| Deferred federal income tax (benefit)/expense | ( | ) | ||||||
| Net change in: | ||||||||
| Other assets | ( | ) | ( | ) | ||||
| Other liabilities | ( | ) | ||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Sales of securities available for sale | ||||||||
| Maturities, prepayments and calls of securities available for sale | ||||||||
| Purchases of securities available for sale | ( | ) | ( | ) | ||||
| Loan originations and payments, net | ( | ) | ||||||
| Additions to premises and equipment | ( | ) | ( | ) | ||||
| Cash received from merger with Community Shores Bank Corporation, | ||||||||
| net of cash paid | ||||||||
| Net cash (used in) investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net change in deposits | ||||||||
| Proceeds from borrowings | ||||||||
| Payments on borrowings and subordinated debentures | ( | ) | ( | ) | ||||
| Issuance of common stock | ||||||||
| Repurchase of common stock | ( | ) | ||||||
| Cash dividends | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Net change in cash and cash equivalents | ( | ) | ||||||
| Beginning cash and cash equivalents | ||||||||
| Ending cash and cash equivalents | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | ||||||||
| Loans transferred to other real estate owned | ||||||||
See accompanying notes to interim consolidated financial statements.
ChoiceOne Financial Services, Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Explanatory Note
On July 1, 2020, ChoiceOne Financial Services, Inc. (“ChoiceOne” or the “Company”) completed the merger of Community Shores Bank Corporation ("Community Shores") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for periods ending after July 1, 2020 include the impact of the merger.
For additional details regarding the merger with Community Shores and the merger of County Bank Corp. ("County") with and into ChoiceOne, see Note 8 (Business Combinations) to the interim consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include ChoiceOne Financial Services, Inc. ("ChoiceOne"), its wholly-owned subsidiary, ChoiceOne Bank (the "Bank"), and ChoiceOne Bank’s wholly-owned subsidiary ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency"). Intercompany transactions and balances have been eliminated in consolidation.
ChoiceOne owns all of the common securities of Community Shores Capital Trust I (the “Capital Trust”). Under U.S. generally accepted accounting principles ("GAAP"), the Capital Trust is not consolidated because it is a variable interest entity and ChoiceOne is not the primary beneficiary.
The accompanying unaudited consolidated financial statements and notes thereto reflect all adjustments ordinary in nature which are, in the opinion of management, necessary for a fair presentation of the Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020, the Consolidated Statements of Income for the three and nine month periods ended September 30, 2021 and September 30, 2020, the Consolidated Statements of Comprehensive Income for the three and nine month periods ended September 30, 2021 and September 30, 2020, the Consolidated Statements of Changes in Shareholders’ Equity for the three and nine month periods ended September 30, 2021 and September 30, 2020, and the Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2021 and September 30, 2020. Operating results for the nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
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-K for the year ended December 31, 2020.
Use of Estimates
To prepare financial statements in conformity with GAAP, 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; therefore, future results could differ. 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 COVID-19 pandemic. Actual results may differ from those estimates.
Loans to Other Financial Institutions
ChoiceOne Bank entered into an agreement with another financial institution to fund mortgage loans. Loans to other financial institutions are purchased participating interests in individual advances made to mortgage bankers nation-wide from an unaffiliated originating bank. The originating bank services these loans and cash flows on the individual advances (principal, interest, and fees) which are allocated pro-rata based on ownership in the participating interest, less fees paid for the servicing activity. The underlying collateral is generally made up of 1-4 family first residential mortgages owned by the mortgage banker and held for sale in the secondary market and have been underwritten using secondary market underwriting standards prior to purchasing the participating interest. Once the mortgage banker delivers the loan to the secondary market, the advance is required to be paid off, including ChoiceOne Bank’s participating interest. If the advance (in which ChoiceOne Bank has a participating interest) is outstanding over 90 days, the originating bank has the right to request the participating interest be paid off by the mortgage banker. The participating interests are held by
Credit risk associated with the participating interest is measured as an allowance for loan losses when necessary. Losses are charged off against the allowance when incurred and recoveries of loan charge-offs are recorded when received. At least quarterly, ChoiceOne Bank reviews the portfolios of participating interests for potential losses including any participating interest that is outstanding over 90 days (even if the advance and participating interest is current). Loans to other financial institutions are excluded from the loans described in Note 3 to the interim consolidated financial statements. At September 30, 2021, there were
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses inherent in the consolidated loan portfolio. Management’s evaluation of the adequacy of the allowance for loan losses is an estimate based on known and inherent risks in the portfolio, past loan loss experience, information about specific borrower situations and estimated collateral values, economic conditions and other relevant factors (including both qualitative and quantitative factors). Allocations of the allowance may be made for specific loans, but the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged-off. Loan losses are charged against the allowance when management believes the a loan balance is uncollectible. Management continues its collection efforts on previously charged-off loan balances and applies recoveries as additions to the allowance for loan losses.
The allowance for loan losses consists of specific allocations for loans that are classified as impaired and pooled allocations for groups of homogeneous loans that are not impaired. A loan is considered impaired when, based on current information and events, management beleives it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement or if the loan is classified as a troubled debt restructuring. Loans for which the terms have been modified and a concession has been made, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Groups of homogeneous loans receive allowance allocations based on historical loss experienced over a selected period.
Management believes the accounting estimate related to the allowance for loan losses is a “critical accounting estimate” because (1) the estimate is highly susceptible to change from period to period because of assumptions concerning the changes in the types and volumes of the portfolios and economic conditions and (2) the impact of recognizing an impairment or loan loss could have a material effect on ChoiceOne’s assets reported on its balance sheet and its net income.
Stock Transactions
A total of
Stock-Based Compensation
ChoiceOne grants restricted stock units to a select group of employees under the Stock Incentive Plan of 2012. All of the restricted stock units are initially unvested and vest three years after the grant date. Certain additional vesting provisions apply. Each unit, once vested, is settled by delivery of one share of ChoiceOne common stock.
Reclassifications
Certain amounts presented in prior periods have been reclassified to conform to the current presentation.
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance attempts to reflect an entity’s current estimate of all expected credit losses and broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity may apply methods that reasonably reflect its expectations of the credit loss estimate. Although an entity may still use its current systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. Additionally, credit losses on available-for-sale debt securities will have to be presented as an allowance rather than as a write-down. This ASU is effective for fiscal years beginning after December 15, 2022, and for interim periods within those years for companies considered a smaller reporting company with the Securities and Exchange Commission. ChoiceOne was classified as a smaller reporting company as of the determination date of November 15, 2019. Management is currently evaluating the impact of this new ASU on its consolidated financial statements which may be significant.
Goodwill
Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit's fair value. Accounting pronouncements allow a company to first perform a qualitative assessment for goodwill prior to a quantitative assessment (Step 1 assessment). If the results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative assessment must be performed. If not, there is no further assessment required. ChoiceOne acquired Valley Ridge Financial Corp. in 2006, County in 2019, and Community Shores in 2020, which resulted in the recognition of goodwill of $
Management performed its annual qualitative assessment of goodwill as of June 30, 2021. In evaluating whether it is more likely than not that the fair value of ChoiceOne's operations was less than the carrying amount, management assessed the relevant events and circumstances such as the ones noted in ASC 350-20-35-3c. The analysis consisted of a review of ChoiceOne’s current and expected future financial performance, the potential impact of the COVID-19 pandemic on the ability of ChoiceOne’s borrowers to comply with loan terms, and the impact that reductions in both short-term and long-term interest rates have had and may continue to have on net interest margin and mortgage sales activity. The share price and book value of ChoiceOne’s stock were also compared to the prior year. Management also compared average deal values for recent closed bank transactions to ChoiceOne transactions. Despite ChoiceOne's market capitalization declining slightly from November 30, 2020 to June 30, 2021, ChoiceOne's financial performance remained positive. In assessing the totality of the events and circumstances, management determined that it was more likely than not that the fair value of ChoiceOne’s operations, from a qualitative perspective, exceeded the carrying value as of June 30, 2021 and impairment of goodwill was not necessary.
ChoiceOne’s stock price per share was less than its book value as of September 30, 2021. This indicated that goodwill may be impaired and resulted in management performing another qualitative goodwill impairment assessment as of the end of the third quarter of 2021. As a result of the analysis, management concluded that it was more-likely-than-not that the fair value of the reporting unit was greater than the carrying value. This was evidenced by the strong financial indicators, solid credit quality ratios, as well as the strong capital position of ChoiceOne. In addition, revenue in the first nine months of 2021 reflected significant and continuing growth in ChoiceOne's interest income, as well as net Small Business Administration fees related to Paycheck Protection Program loans. Based on the results of the qualitative analysis, management believed that a quantitative analysis was not necessary as of September 30, 2021.
NOTE 2 – SECURITIES
The fair value of equity securities and the related gross unrealized gains (losses) recognized in noninterest income were as follows:
| September 30, 2021 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| (Dollars in thousands) | Amortized | Unrealized | Unrealized | Fair | ||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| Equity securities | $ | $ | $ | ( | ) | $ | ||||||||||
| December 31, 2020 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| (Dollars in thousands) | Amortized | Unrealized | Unrealized | Fair | ||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| Equity securities | $ | $ | $ | $ | ||||||||||||
The fair value of securities available for sale and the related unrealized gains and losses recognized in accumulated other comprehensive income were as follows:
| September 30, 2021 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| (Dollars in thousands) | Amortized | Unrealized | Unrealized | Fair | ||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| U.S. Government and federal agency | $ | $ | $ | $ | ||||||||||||
| U.S. Treasury notes and bonds | ( | ) | ||||||||||||||
| State and municipal | ( | ) | ||||||||||||||
| Mortgage-backed | ( | ) | ||||||||||||||
| Corporate | ( | ) | ||||||||||||||
| Asset-backed securities | ( | ) | ||||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
| December 31, 2020 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| (Dollars in thousands) | Amortized | Unrealized | Unrealized | Fair | ||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| U.S. Government and federal agency | $ | $ | $ | $ | ||||||||||||
| U.S. Treasury notes and bonds | ||||||||||||||||
| State and municipal | ( | ) | ||||||||||||||
| Mortgage-backed | ( | ) | ||||||||||||||
| Corporate | ( | ) | ||||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
ChoiceOne reviews its securities portfolio on a quarterly basis to determine whether unrealized losses are considered to be temporary or other-than-temporary.
Presented below is a schedule of maturities of securities as of September 30, 2021, the fair value of securities as of September 30, 2021 and December 31, 2020, and the weighted average yields of securities as of September 30, 2021. Callable securities in the money are presumed called and matured at the callable date.
| Securities maturing within: | ||||||||||||||||||||||||
| Fair Value | ||||||||||||||||||||||||
| Less than | 1 Year - | 5 Years - | More than | at September 30, | Fair Value at Dec. 31, | |||||||||||||||||||
| (Dollars in thousands) | 1 Year | 5 Years | 10 Years | 10 Years | 2021 | 2020 | ||||||||||||||||||
| U.S. Government and federal agency | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| U.S. Treasury notes and bonds | ||||||||||||||||||||||||
| State and municipal | ||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||
| Asset-backed securities | ||||||||||||||||||||||||
| Total debt securities | ||||||||||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||||||||||
| Equity securities | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Weighted average yields: | ||||||||||||||||||||
| Less than | 1 Year - | 5 Years - | More than | |||||||||||||||||
| 1 Year | 5 Years | 10 Years | 10 Years | Total | ||||||||||||||||
| U.S. Government and federal agency | % | % | % | % | % | |||||||||||||||
| U.S. Treasury notes and bonds | ||||||||||||||||||||
| State and municipal | ||||||||||||||||||||
| Corporate | ||||||||||||||||||||
| Asset-backed securities | ||||||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||||||
| Equity securities | ||||||||||||||||||||
Following is information regarding unrealized gains and losses on equity securities for the three and nine month periods ended September 30, 2021 and 2020:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net gains and (losses) recognized during the period | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| 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 | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses and balances in the loan portfolio were as follows:
| Commercial | ||||||||||||||||||||||||||||||||
| (Dollars in thousands) | and | Commercial | Construction | Residential | ||||||||||||||||||||||||||||
| Agricultural | Industrial | Consumer | Real Estate | Real Estate | Real Estate | Unallocated | Total | |||||||||||||||||||||||||
| Allowance for Loan Losses Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provision | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Allowance for Loan Losses Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provision | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Loans | ||||||||||||||||||||||||||||||||
| September 30, 2021 | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
| Acquired with deteriorated credit quality | ||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| 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, 2020 | ||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provision | ( | ) | ||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Allowance for Loan Losses Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provision | ( | ) | ||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Loans | ||||||||||||||||||||||||||||||||
| September 30, 2020 | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
| Acquired with deteriorated credit quality | ||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| 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, 2020 | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Loans | ||||||||||||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| Collectively evaluated for impairment | ||||||||||||||||||||||||||||||||
| Acquired with deteriorated credit quality | ||||||||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
The process to monitor the credit quality of ChoiceOne’s loan portfolio includes tracking (1) the risk ratings of business loans, (2) the level of classified business loans, and (3) delinquent and nonperforming consumer loans. Business loans are risk rated on a scale of 1 to 9. A description of the characteristics of the ratings follows:
Risk Rating 1 through 5 or pass: These loans are considered pass credits. They exhibit acceptable credit risk and demonstrate the ability to repay the loan from normal business operations.
Risk rating 6 or special mention: Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions that have clearly jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that ChoiceOne Bank will sustain some future loss if such weaknesses are not corrected. Clear loss potential, however, does not have to exist in any individual assets classified as substandard. Loans falling into this category should have clear action plans and timelines with benchmarks to determine which direction the relationship will move.
Risk rating 7 or substandard: Loans and other credit extensions graded “7” have all the weaknesses inherent in those graded “6”, with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. Loans in this classification should be evaluated for non-accrual status. All nonaccrual commercial and Retail loans must be at a minimum graded a risk code “7”.
Risk rating 8 or doubtful: Loans and other credit extensions bearing this grade have been determined to have the extreme probability of some loss, but because of certain important and reasonably specific factors, the amount of loss cannot be determined. Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral.
Risk rating 9 or loss: Loans in this classification are considered uncollectible and cannot be justified as a viable asset of ChoiceOne Bank. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future.
Information regarding ChoiceOne Bank's credit exposure was as follows:
Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category
| (Dollars in thousands) | Agricultural | Commercial and Industrial | Commercial Real Estate | |||||||||||||||||||||
| September 30, | December 31, | September 30, | December 31, | September 30, | December 31, | |||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity
| (Dollars in thousands) | Consumer | Construction Real Estate | Residential Real Estate | |||||||||||||||||||||
| September 30, | December 31, | September 30, | December 31, | September 30, | December 31, | |||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Performing | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Nonperforming | ||||||||||||||||||||||||
| Nonaccrual | ||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||||
The following table provides information on loans that were considered troubled debt restructurings ("TDRs") that were modified during the three and nine months ended September 30, 2021 and September 30, 2020.
| 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 | $ | $ | $ | $ | ||||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||
| Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 | |||||||||||||||||||||||
| 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 | $ | $ | $ | $ | ||||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||
There were
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2020 | September 30, 2020 | |||||||||||||||
| (Dollars in thousands) | Number | Recorded | Number | Recorded | ||||||||||||
| of Loans | Investment | of Loans | Investment | |||||||||||||
| Agricultural | $ | $ | ||||||||||||||
| Commercial Real Estate | ||||||||||||||||
| Total | $ | $ | ||||||||||||||
In March of 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed into law. Among other things, the CARES Act provides that certain loans subject to modifications related to the COVID-19 pandemic need not be classified as TDRs. Further, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” on March 22, 2020, followed by a revised statement on April 7, 2020, providing in part that short-term modifications to loans made on a good faith basis to borrowers who were current as of the implementation date of the statements are not considered TDRs. As a result of the pandemic, ChoiceOne provided a modification program to borrowers that included certain concessions such as interest only payments or payment deferrals. As of September 30, 2021, all deferments had resumed payments in accordance with loan terms.
Impaired loans by loan category follow:
| Unpaid | ||||||||||||
| (Dollars in thousands) | Recorded | Principal | Related | |||||||||
| Investment | Balance | Allowance | ||||||||||
| September 30, 2021 | ||||||||||||
| With no related allowance recorded | ||||||||||||
| Agricultural | $ | $ | $ | - | ||||||||
| Commercial and industrial | - | |||||||||||
| Consumer | - | |||||||||||
| Construction real estate | - | |||||||||||
| Commercial real estate | - | |||||||||||
| Residential real estate | - | |||||||||||
| Subtotal | - | |||||||||||
| With an allowance recorded | ||||||||||||
| Agricultural | ||||||||||||
| Commercial and industrial | ||||||||||||
| Consumer | ||||||||||||
| Construction real estate | ||||||||||||
| Commercial real estate | ||||||||||||
| Residential real estate | ||||||||||||
| Subtotal | ||||||||||||
| Total | ||||||||||||
| Agricultural | ||||||||||||
| Commercial and industrial | ||||||||||||
| Consumer | ||||||||||||
| Construction real estate | ||||||||||||
| Commercial real estate | ||||||||||||
| Residential real estate | ||||||||||||
| Total | $ | $ | $ | |||||||||
| Unpaid | ||||||||||||
| (Dollars in thousands) | Recorded | Principal | Related | |||||||||
| Investment | Balance | Allowance | ||||||||||
| December 31, 2020 | ||||||||||||
| With no related allowance recorded | ||||||||||||
| Agricultural | $ | $ | $ | - | ||||||||
| Commercial and industrial | - | |||||||||||
| Consumer | - | |||||||||||
| Construction real estate | - | |||||||||||
| Commercial real estate | - | |||||||||||
| Residential real estate | - | |||||||||||
| Subtotal | - | |||||||||||
| With an allowance recorded | ||||||||||||
| Agricultural | ||||||||||||
| Commercial and industrial | ||||||||||||
| Consumer | ||||||||||||
| Construction real estate | ||||||||||||
| Commercial real estate | ||||||||||||
| Residential real estate | ||||||||||||
| Subtotal | ||||||||||||
| Total | ||||||||||||
| Agricultural | ||||||||||||
| Commercial and industrial | ||||||||||||
| Consumer | ||||||||||||
| Construction real estate | ||||||||||||
| Commercial real estate | ||||||||||||
| Residential real estate | ||||||||||||
| Total | $ | $ | $ | |||||||||
The following schedule provides information regarding average balances of impaired loans and interest recognized on impaired loans for the three and nine month periods ended September 30, 2021 and 2020:
| Average | Interest | |||||||
| (Dollars in thousands) | Recorded | Income | ||||||
| Investment | Recognized | |||||||
| Three Months Ended September 30, 2021 | ||||||||
| With no related allowance recorded | ||||||||
| Agricultural | $ | $ | ||||||
| Commercial and industrial | ||||||||
| Consumer | ||||||||
| Construction real estate | ||||||||
| Commercial real estate | ||||||||
| Residential real estate | ||||||||
| Subtotal | ||||||||
| With an allowance recorded | ||||||||
| Agricultural | ||||||||
| Commercial and industrial | ||||||||
| Consumer | ||||||||
| Construction real estate | ||||||||
| Commercial real estate | ||||||||
| Residential real estate | ||||||||
| Subtotal | ||||||||
| Total | ||||||||
| Agricultural | ||||||||
| Commercial and industrial | ||||||||
| Consumer | ||||||||
| Construction real estate | ||||||||
| Commercial real estate | ||||||||
| Residential real estate | ||||||||
| Total | $ | $ | ||||||
| Average | Interest | |||||||
| (Dollars in thousands) | Recorded | Income | ||||||
| Investment | Recognized | |||||||
| Three Months Ended September 30, 2020 | ||||||||
| With no related allowance recorded | ||||||||
| Agricultural | $ | $ | ||||||
| Commercial and industrial | ||||||||
| Consumer | ||||||||
| Construction real estate | ||||||||
| Commercial real estate | ||||||||
| Residential real estate | ||||||||
| Subtotal | ||||||||
| With an allowance recorded | ||||||||
| Agricultural | ||||||||
| Commercial and industrial | ||||||||
| Consumer | ||||||||
| Construction real estate | ||||||||
| Commercial real estate | ||||||||
| Residential real estate | ||||||||
| Subtotal | ||||||||
| Total | ||||||||
| Agricultural | ||||||||
| Commercial and industrial | ||||||||
| Consumer | ||||||||
| Construction real estate | ||||||||
| Commercial real estate | ||||||||
| Residential real estate | ||||||||
| Total | $ | $ | ||||||
| Average | Interest | |||||||
| (Dollars in thousands) | Recorded | Income | ||||||
| Investment | Recognized | |||||||
| Nine Months Ended September 30, 2021 | ||||||||
| With no related allowance recorded | ||||||||
| Agricultural | $ | $ | ||||||
| Commercial and industrial | ||||||||
| Consumer | ||||||||
| Construction real estate | ||||||||
| Commercial real estate | ||||||||
| Residential real estate | ||||||||
| Subtotal | ||||||||
| With an allowance recorded | ||||||||
| Agricultural | ||||||||
| Commercial and industrial | ||||||||
| Consumer | ||||||||
| Construction real estate | ||||||||
| Commercial real estate | ||||||||
| Residential real estate | ||||||||
| Subtotal | ||||||||
| Total | ||||||||
| Agricultural | ||||||||
| Commercial and industrial | ||||||||
| Consumer | ||||||||
| Construction real estate | ||||||||
| Commercial real estate | ||||||||
| Residential real estate | ||||||||
| Total | $ | $ | ||||||
| Average | Interest | |||||||
| (Dollars in thousands) | Recorded | Income | ||||||
| Investment | Recognized | |||||||
| Nine Months Ended September 30, 2020 | ||||||||
| With no related allowance recorded | ||||||||
| Agricultural | $ | $ | ||||||
| Commercial and industrial | ||||||||
| Consumer | ||||||||
| Construction real estate | ||||||||
| Commercial real estate | ||||||||
| Residential real estate | ||||||||
| Subtotal | ||||||||
| With an allowance recorded | ||||||||
| Agricultural | ||||||||
| Commercial and industrial | ||||||||
| Consumer | ||||||||
| Construction real estate | ||||||||
| Commercial real estate | ||||||||
| Residential real estate | ||||||||
| Subtotal | ||||||||
| Total | ||||||||
| Agricultural | ||||||||
| Commercial and industrial | ||||||||
| Consumer | ||||||||
| Construction real estate | ||||||||
| Commercial real estate | ||||||||
| Residential real estate | ||||||||
| Total | $ | $ | ||||||
An aging analysis of loans by loan category follows:
| Loans | ||||||||||||||||||||||||||||
| Loans | Loans | Past Due | Loans | |||||||||||||||||||||||||
| Past Due | Past Due | Greater | 90 Days Past | |||||||||||||||||||||||||
| (Dollars in thousands) | 30 to 59 | 60 to 89 | Than 90 | Loans Not | Total | Due and | ||||||||||||||||||||||
| Days (1) | Days (1) | Days (1) | Total (1) | Past Due | Loans | Accruing | ||||||||||||||||||||||
| September 30, 2021 | ||||||||||||||||||||||||||||
| Agricultural | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||
| Construction real estate | ||||||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||||
| Agricultural | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||
| Construction real estate | ||||||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
(1) Includes nonaccrual loans.
Nonaccrual loans by loan category follow:
| (Dollars in thousands) | September 30, | December 31, | ||||||
| 2021 | 2020 | |||||||
| Agricultural | $ | $ | ||||||
| Commercial and industrial | ||||||||
| Consumer | ||||||||
| Commercial real estate | ||||||||
| Construction real estate | ||||||||
| Residential real estate | ||||||||
| $ | $ | |||||||
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 | $ | $ | $ | |||||||||
| Nonaccretable difference | ( | ) | ( | ) | ||||||||
| Expected cash flows | ||||||||||||
| Accretable yield | ( | ) | ( | ) | ( | ) | ||||||
| Carrying balance at acquisition date | $ | $ | $ | |||||||||
The table below presents a roll forward of the accretable yield on County Bank Corp. acquired loan portfolio for the year ended December 31, 2020 and the nine months ended September 30, 2021 (dollars in thousands):
| (Dollars in thousands) | Acquired | Acquired | Acquired | |||||||||
| Impaired | Non-impaired | Total | ||||||||||
| Balance, January 1, 2020 | $ | $ | $ | |||||||||
| Accretion January 1, 2020 through December 31, 2020 | ( | ) | ( | ) | ( | ) | ||||||
| Balance, December 31, 2020 | ||||||||||||
| Accretion January 1, 2021 through September 30, 2021 | ( | ) | ( | ) | ||||||||
| Transfer from non-accretable to accretable yield | ||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | |||||||||
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 | $ | $ | $ | |||||||||
| Nonaccretable difference | ( | ) | ( | ) | ||||||||
| Expected cash flows | ||||||||||||
| Accretable yield | ( | ) | ( | ) | ( | ) | ||||||
| Carrying balance at acquisition date | $ | $ | $ | |||||||||
The table below presents a roll forward of the accretable yield on Community Shores Bank Corporation acquired loan portfolio for the year ended December 31, 2020 and the nine months ended September 30, 2021 (dollars in thousands):
| Acquired | Acquired | Acquired | ||||||||||
| Impaired | Non-impaired | Total | ||||||||||
| Balance, January 1, 2020 | $ | $ | $ | |||||||||
| Merger with Community Shores Bank Corporation on July 1, 2020 | ||||||||||||
| Accretion July 1, 2020 through December 31, 2020 | ( | ) | ( | ) | ( | ) | ||||||
| Balance, December 31, 2020 | ||||||||||||
| Accretion January 1, 2021 through September 30, 2021 | ( | ) | ( | ) | ( | ) | ||||||
| Balance, September 30, 2021 | $ | $ | $ | |||||||||
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 | |||||||||||||||
| (Dollars in thousands, except share data) | September 30, | September 30, | ||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Basic | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Weighted average common shares outstanding | ||||||||||||||||
| Basic earnings per common shares | $ | $ | $ | $ | ||||||||||||
| Diluted | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Weighted average common shares outstanding | ||||||||||||||||
| Plus dilutive stock options and restricted stock units | ||||||||||||||||
| Weighted average common shares outstanding and potentially dilutive shares | ||||||||||||||||
| Diluted earnings per common share | $ | $ | $ | $ | ||||||||||||
There were
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) | ||||||||||||||||
| September 30, 2021 | ||||||||||||||||||||
| Assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Equity securities at fair value | ||||||||||||||||||||
| Securities available for sale | ||||||||||||||||||||
| Federal Home Loan Bank and Federal | ||||||||||||||||||||
| Reserve Bank stock | ||||||||||||||||||||
| Loans held for sale | ||||||||||||||||||||
| Loans to other financial institutions | ||||||||||||||||||||
| Loans, net | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Interest rate lock commitments | ||||||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Noninterest-bearing deposits | ||||||||||||||||||||
| Interest-bearing deposits | ||||||||||||||||||||
| Subordinated debentures | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||
| Assets | ||||||||||||||||||||
| Cash and due from banks | $ | $ | $ | $ | $ | |||||||||||||||
| Equity securities at fair value | ||||||||||||||||||||
| Securities available for sale | ||||||||||||||||||||
| Federal Home Loan Bank and Federal | ||||||||||||||||||||
| Reserve Bank stock | ||||||||||||||||||||
| Loans held for sale | ||||||||||||||||||||
| Loans to other financial institutions | ||||||||||||||||||||
| Loans, net | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Interest rate lock commitments | ||||||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Noninterest-bearing deposits | ||||||||||||||||||||
| Interest-bearing deposits | ||||||||||||||||||||
| Borrowings | ||||||||||||||||||||
| Subordinated debentures | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
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.
There were no liabilities measured at fair value as of September 30, 2021 or December 31, 2020. Disclosures concerning assets measured at fair value are as follows:
Assets Measured at Fair Value on a Recurring Basis
| Quoted Prices |
||||||||||||||||
| In Active |
Significant |
|||||||||||||||
| Markets for |
Other |
Significant |
||||||||||||||
| Identical |
Observable |
Unobservable |
Balance |
|||||||||||||
| (Dollars in thousands) |
Assets |
Inputs |
Inputs |
at Date |
||||||||||||
| (Level 1) |
(Level 2) |
(Level 3) |
Indicated |
|||||||||||||
| Equity Securities Held at Fair Value - September 30, 2021 |
||||||||||||||||
| Equity securities |
$ | $ | $ | $ | ||||||||||||
| Investment Securities, Available for Sale - September 30, 2021 |
||||||||||||||||
| U. S. Government and federal agency |
$ | $ | $ | $ | ||||||||||||
| U. S. Treasury notes and bonds |
||||||||||||||||
| State and municipal |
||||||||||||||||
| Mortgage-backed |
||||||||||||||||
| Corporate |
||||||||||||||||
| Asset-backed securities |
||||||||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
| Equity Securities Held at Fair Value - December 31, 2020 |
||||||||||||||||
| Equity securities |
$ | $ | $ | $ | ||||||||||||
| Investment Securities, Available for Sale - December 31, 2020 |
||||||||||||||||
| U. S. Government and federal agency |
$ | $ | $ | $ | ||||||||||||
| U. S. Treasury notes and bonds |
||||||||||||||||
| State and municipal |
||||||||||||||||
| Mortgage-backed |
||||||||||||||||
| Corporate |
||||||||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis
| Nine Months Ended | |||||||
| (Dollars in thousands) | September 30, | ||||||
| 2021 | 2020 | ||||||
| Equity Securities Held at Fair Value | |||||||
| Balance, January 1 | $ | $ | |||||
| Total realized and unrealized gains included in noninterest income | ( | ) | |||||
| Net purchases, sales, calls, and maturities | |||||||
| Net transfers into Level 3 | |||||||
| Balance, September 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 | $ | ( | ) | $ | |||
| Investment Securities, Available for Sale | |||||||
| Balance, January 1 | $ | $ | |||||
| Total unrealized gains included in other comprehensive income | ( | ) | |||||
| Net purchases, sales, calls, and maturities | |||||||
| Net transfers into Level 3 | |||||||
| Balance, September 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 | $ | ( | ) | $ | |||
Of the available for sale Level 3 assets that were held by ChoiceOne at September 30, 2021, the net unrealized gain as of September 30, 2021 was $
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 primarily consist of bonds issued by local municipalities and common and preferred equity securities of community banks. 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:
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, 2021 | $ | $ | $ | $ | ||||||||||||
| December 31, 2020 | $ | $ | $ | $ | ||||||||||||
| Other Real Estate | ||||||||||||||||
| September 30, 2021 | $ | $ | $ | $ | ||||||||||||
| December 31, 2020 | $ | $ | $ | $ | ||||||||||||
| Mortgage Loan Servicing Rights | ||||||||||||||||
| September 30, 2021 | $ | $ | $ | $ | ||||||||||||
| December 31, 2020 | $ | $ | $ | $ | ||||||||||||
Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. 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 impaired loans that were posted to the allowance for loan losses and write-downs of other real estate that were posted to a valuation account.
NOTE 7 – REVENUE FROM CONTRACTS WITH CUSTOMERS
ChoiceOne has a variety of sources of revenue, which include interest and fees from customers as well as revenue from non-customers. ASC Topic 606, Revenue from Contracts With Customers, covers certain sources of revenue that are classified within noninterest income in the Consolidated Statements of Income. Sources of revenue that are included in the scope of ASC Topic 606 include service charges and fees on deposit accounts, interchange income, investment asset management income and transaction-based revenue, and other charges and fees for customer services.
Service Charges and Fees on Deposit Accounts
Revenue includes charges and fees to provide account maintenance, overdraft services, wire transfers, funds transfer, and other deposit-related services. Account maintenance fees such as monthly service charges are recognized over the period of time that the service is provided. Transaction fees such as wire transfer charges are recognized when the service is provided to the customer.
Interchange Income
Revenue includes debit card interchange and network revenues. This revenue is earned on debit card transactions that are conducted through payment networks such as MasterCard. The revenue is recorded as services are delivered and is presented net of interchange expenses.
Investment Commission Income
Revenue includes fees from the investment management advisory services and revenue is recognized when services are rendered. Revenue also includes commissions received from the placement of brokerage transactions for purchase or sale of stocks or other investments. Commission income is recognized when the transaction has been completed.
Trust Fee Income
Revenue includes fees from the management of trust assets and from other related advisory services. Revenue is recognized when services are rendered.
Following is noninterest income separated by revenue within the scope of ASC 606 and revenue within the scope of other GAAP topics:
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| (Dollars in thousands) |
2021 |
2020 |
2021 |
2020 |
||||||||||||
| Service charges and fees on deposit accounts |
$ | $ | $ | $ | ||||||||||||
| Interchange income |
||||||||||||||||
| Investment commission income |
||||||||||||||||
| Trust fee income |
||||||||||||||||
| Other charges and fees for customer services |
||||||||||||||||
| Noninterest income from contracts with customers within the scope of ASC 606 |
||||||||||||||||
| Noninterest income within the scope of other GAAP topics |
||||||||||||||||
| Total noninterest income |
$ | $ | $ | $ | ||||||||||||
NOTE 8 – BUSINESS COMBINATIONS
Community Shores Bank Corporation
ChoiceOne completed the acquisition of Community Shores Bank Corporation (“Community Shores”) with and into ChoiceOne, with ChoiceOne as the surviving entity, effective on July 1, 2020. Community Shores had
The table below presents the allocation of purchase price for the merger with Community Shores (dollars in thousands):
| Purchase Price |
||||
| Consideration |
$ | |||
| Net assets acquired: |
||||
| Cash and cash equivalents |
||||
| Securities available for sale |
||||
| Federal Home Loan Bank and Federal Reserve Bank stock |
||||
| Originated loans |
||||
| Premises and equipment |
||||
| Other real estate owned |
||||
| Deposit based intangible |
||||
| Other assets |
||||
| Total assets |
||||
| Non-interest bearing deposits |
||||
| Interest bearing deposits |
||||
| Total deposits |
||||
| Subordinated debentures |
||||
| Other liabilities |
||||
| Total liabilities |
||||
| Net assets acquired |
||||
| Goodwill |
$ |
County Bank Corp
ChoiceOne completed the merger of County Bank Corp (“County”) with and into ChoiceOne effective on October 1, 2019. County had
The table below presents the allocation of purchase price for the merger with County (dollars in thousands):
| Purchase Price |
||||
| Consideration |
$ | |||
| Net assets acquired: |
||||
| Cash and cash equivalents |
||||
| Equity securities at fair value |
||||
| Securities available for sale |
||||
| Federal Home Loan Bank and Federal Reserve Bank stock |
||||
| Loans to other financial institutions |
||||
| Originated loans |
||||
| Premises and equipment |
||||
| Other real estate owned |
||||
| Deposit based intangible |
||||
| Bank owned life insurance |
||||
| Other assets |
||||
| Total assets |
||||
| Non-interest bearing deposits |
||||
| Interest bearing deposits |
||||
| Total deposits |
||||
| Federal funds purchased |
||||
| Advances from Federal Home Loan Bank |
||||
| Other liabilities |
||||
| Total liabilities |
||||
| Net assets acquired |
||||
| Goodwill |
$ |
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 subsidiaries, ChoiceOne Insurance Agencies, Inc., Lakestone Financial Services, Inc., and Community Shores’ Financial Services, 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”, and variations of such words and similar expressions are intended to identify such forward-looking statements. Management’s determination of the provision and allowance for loan losses, the carrying value of goodwill, loan servicing rights, other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) and management’s assumptions concerning pension and other postretirement benefit plans involve judgments that are inherently forward-looking. Examples of forward-looking statements also include, but are not limited to, statements related to risks and uncertainties related to, and the impact of, the COVID-19 pandemic on the businesses, financial condition and results of operations of ChoiceOne and its customers and statements regarding the outlook and expectations of ChoiceOne and its customers. All of the information concerning interest rate sensitivity is forward-looking. All statements with references to future time periods are forward-looking. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements. Furthermore, ChoiceOne undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.
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, 2020 and in Part II, Item 1A of this Quarterly Report on Form 10-Q. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.
RESULTS OF OPERATIONS
Net income for the third quarter of 2021 was $5,749,000, which represented an increase of $1,920,000 or 50% compared to the third quarter of 2020. Basic and diluted earnings per common share were $0.75 for the third quarter of 2021 compared to $0.49 for the third quarter of the prior year. Net income for the first nine months of 2021 was $17,029,000 or $2.20 per diluted share, compared to $11,513,000 or $1.55 per diluted share in the first nine months of 2020. Growth in net income in the first nine months of 2021 compared to the same period in the prior year resulted in part from the effects of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act and Paycheck Protection Program ("PPP") fees and deposit dollars resulting from the CARES Act. The merger with Community Shores Bank Corporation ("Community Shores") that was effective on July 1, 2020 also had an impact on ChoiceOne's financial results. There were no merger expenses in the first nine months of 2021. Net income for the third quarter and first nine months of 2020, excluding $1,423,000 and $2,167,000 of tax-effected merger expenses, respectively was $5,252,000 or $0.67 per diluted share and $13,680,000 or $1.84 per diluted share, respectively.
The return on average assets and return on average shareholders’ equity were 1.08% and 10.01%, respectively, for the first nine months of 2021, compared to 0.87% and 7.50%, respectively, for the same period in 2020.
Net income and diluted earnings per share excluding tax-effected merger-related expenses are non-GAAP financial measures. Please refer to the section below titled “Non-GAAP Financial Measures” for a reconciliation to the most directly comparable GAAP financial measures.
Private Placement Subordinated Debt Offering
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 intends to use net proceeds of the private placement for general corporate purposes, including support for organic growth plans, possible redemption of senior debt, common stock repurchases, and support for bank-level capital ratios.
During the third quarter of 2021, ChoiceOne used a portion of the proceeds from this private placement to pay off $2.6 million of other outstanding debt and an additional $5.0 million of proceeds was downstreamed to the Bank. The notes will initially bear interest at a fixed interest rate of 3.25% per annum until September 3, 2026, after which time the interest rate will reset quarterly to a floating rate equal to a benchmark rate, which is expected to be the then current three-month term Secured Overnight Financing Rate (SOFR) plus 255 basis points until the notes’ maturity on September 3, 2031. The notes are redeemable by ChoiceOne, in whole or in part, on or after September 3, 2026, and at any time upon the occurrence of certain events. The notes have been structured to qualify as Tier 2 capital for ChoiceOne for regulatory capital purposes.
Acquisition of Community Shores Bank Corporation
ChoiceOne completed the acquisition of Community Shores Bank Corporation (“Community Shores”) with and into ChoiceOne effective on July 1, 2020. Community Shores had 4 branch offices as of the date of the acquisition. Total assets of Community Shores as of July 1, 2020 were $244.5 million, including total loans of $174.8 million. Deposits acquired in the merger, the majority of which were core deposits, totaled $227.8 million. The impact of the merger has been included in ChoiceOne’s results of operations since the effective date of the merger. As consideration in the merger, ChoiceOne issued 524,139 shares of ChoiceOne common stock and cash in the amount of $5,390,000 with an approximate total value of $20.9 million. The consolidation of Community Shores Bank with and into ChoiceOne Bank was completed on October 16, 2020.
The COVID-19 Pandemic
Consistent with federal banking agencies' “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus,” ChoiceOne is working with its borrowers affected by the COVID-19 pandemic. ChoiceOne granted deferrals on numerous loans to borrowers affected by the pandemic; however, as of September 30, 2021, all deferments had resumed payments in accordance with loan terms.
In addition, ChoiceOne processed over $126 million in PPP loans in 2020 and acquired an additional $37 million in PPP loans in the merger with Community Shores. ChoiceOne originated $89.1 million in PPP loans in the first nine months of 2021. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. PPP loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven in whole or in part. Payments are deferred until either the date on which the Small Business Administration ("SBA") remits the amount of forgiveness proceeds to the lender or the date that is ten months after the last day of the covered period if the borrower does not apply for forgiveness within that ten-month period. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. Upon SBA forgiveness, unrecognized fees are recognized into interest income. In the third quarter and first nine months of 2021, $48.7 million and $164.5 million of PPP loans were forgiven resulting in $1.6 million and $4.0 million of fee income, respectively. $2.4 million in PPP fee income remained deferred as of September 30, 2021. $61.2 million in PPP loans remain on ChoiceOne's balance sheet at September 30, 2021.
Dividends
Cash dividends of $1,903,000 or $0.25 per share were declared in the third quarter of 2021, compared to $1,558,000 or $0.20 per share declared in the third quarter of 2020. Cash dividends declared in the first nine months of 2021 were $5,322,000 or $0.69 per share, compared to $4,459,000 or $0.60 per share in the prior year. The cash dividend payout percentage was 31% for the first nine months of 2021, compared to 39% 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 and nine month periods ended September 30, 2021 and 2020. Table 1 documents ChoiceOne’s average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities. Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates. These tables are referred to in the discussion of interest income, interest expense and net interest income.
Table 1 – Average Balances and Tax-Equivalent Interest Rates
| Three Months Ended September 30, |
||||||||||||||||||||||||
| 2021 |
2020 |
|||||||||||||||||||||||
| (Dollars in thousands) |
Average |
Average |
||||||||||||||||||||||
| Balance |
Interest |
Rate |
Balance |
Interest |
Rate |
|||||||||||||||||||
| Assets: |
||||||||||||||||||||||||
| Loans (1)(3) |
$ | 1,021,326 | $ | 12,412 | 4.86 | % |
$ | 1,139,634 | $ | 13,052 | 4.58 | % |
||||||||||||
| Taxable securities (2) |
641,430 | 2,821 | 1.76 | 214,382 | 1,149 | 2.14 | ||||||||||||||||||
| Nontaxable securities (1) |
281,223 | 1,850 | 2.63 | 158,982 | 1,159 | 2.92 | ||||||||||||||||||
| Other |
106,831 | 38 | 0.14 | 125,991 | 40 | 0.13 | ||||||||||||||||||
| Interest-earning assets |
2,050,810 | 17,121 | 3.34 | 1,638,989 | 15,400 | 3.76 | ||||||||||||||||||
| Noninterest-earning assets |
183,418 | 200,062 | ||||||||||||||||||||||
| Total assets |
$ | 2,234,228 | $ | 1,839,051 | ||||||||||||||||||||
| Liabilities and Shareholders' Equity: |
||||||||||||||||||||||||
| Interest-bearing demand deposits |
$ | 850,963 | $ | 485 | 0.23 | % |
$ | 626,920 | $ | 428 | 0.27 | % |
||||||||||||
| Savings deposits |
407,765 | 144 | 0.14 | 306,198 | 116 | 0.15 | ||||||||||||||||||
| Certificates of deposit |
183,103 | 208 | 0.45 | 194,967 | 402 | 0.83 | ||||||||||||||||||
| Borrowings |
2,667 | 38 | 5.70 | 10,176 | 80 | 3.14 | ||||||||||||||||||
| Subordinated debentures |
9,154 | 151 | 6.60 | 3,064 | 63 | 8.22 | ||||||||||||||||||
| Interest-bearing liabilities |
1,453,652 | 1,026 | 0.28 | 1,141,325 | 1,089 | 0.38 | ||||||||||||||||||
| Demand deposits |
545,251 | 467,709 | ||||||||||||||||||||||
| Other noninterest-bearing liabilities |
5,956 | 7,415 | ||||||||||||||||||||||
| Total liabilities |
2,004,859 | 1,616,449 | ||||||||||||||||||||||
| Shareholders' equity |
229,369 | 222,602 | ||||||||||||||||||||||
| Total liabilities and shareholders' equity |
$ | 2,234,228 | $ | 1,839,051 | ||||||||||||||||||||
| Net interest income (tax-equivalent basis) (Non-GAAP) (1) |
$ | 16,095 | $ | 14,311 | ||||||||||||||||||||
| Net interest margin (tax-equivalent basis) (Non-GAAP) (1) |
3.06 | % |
3.38 | % |
||||||||||||||||||||
| Reconciliation to Reported Net Interest Income |
||||||||||||||||||||||||
| Net interest income (tax-equivalent basis) (Non-GAAP) (1) |
$ | 16,095 | $ | 14,311 | ||||||||||||||||||||
| Adjustment for taxable equivalent interest |
(395 | ) | (249 | ) | ||||||||||||||||||||
| Net interest income (GAAP) |
$ | 15,700 | $ | 14,062 | ||||||||||||||||||||
| Net interest margin (GAAP) |
3.14 | % |
3.49 | % |
||||||||||||||||||||
|
|
(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. |
| Nine Months Ended September 30, |
||||||||||||||||||||||||
| 2021 |
2020 |
|||||||||||||||||||||||
| (Dollars in thousands) |
Average |
Average |
||||||||||||||||||||||
| Balance |
Interest |
Rate |
Balance |
Interest |
Rate |
|||||||||||||||||||
| Assets: |
||||||||||||||||||||||||
| Loans (1)(3) |
$ | 1,047,326 | $ | 36,666 | 4.67 | % |
$ | 973,334 | $ | 34,125 | 4.67 | % |
||||||||||||
| Taxable securities (2) |
542,216 | 7,073 | 1.74 | 267,577 | 4,563 | 2.27 | ||||||||||||||||||
| Nontaxable securities (1) |
253,565 | 5,070 | 2.67 | 97,076 | 2,231 | 3.06 | ||||||||||||||||||
| Other |
81,912 | 70 | 0.11 | 69,061 | 241 | 0.46 | ||||||||||||||||||
| Interest-earning assets |
1,925,019 | 48,879 | 3.39 | 1,407,048 | 41,160 | 3.90 | ||||||||||||||||||
| Noninterest-earning assets |
180,522 | 349,281 | ||||||||||||||||||||||
| Total assets |
$ | 2,105,541 | $ | 1,756,329 | ||||||||||||||||||||
| Liabilities and Shareholders' Equity: |
||||||||||||||||||||||||
| Interest-bearing demand deposits |
$ | 772,950 | $ | 1,379 | 0.24 | % |
$ | 550,385 | $ | 1,409 | 0.34 | % |
||||||||||||
| Savings deposits |
385,160 | 391 | 0.14 | 247,485 | 181 | 0.10 | ||||||||||||||||||
| Certificates of deposit |
187,873 | 786 | 0.56 | 180,762 | 1,639 | 1.21 | ||||||||||||||||||
| Borrowings |
4,608 | 95 | 2.76 | 22,947 | 304 | 1.77 | ||||||||||||||||||
| Subordinated debentures |
5,147 | 253 | 6.55 | 1,021 | 63 | 8.23 | ||||||||||||||||||
| Interest-bearing liabilities |
1,355,738 | 2,904 | 0.29 | 1,002,600 | 3,596 | 0.48 | ||||||||||||||||||
| Demand deposits |
518,327 | 370,032 | ||||||||||||||||||||||
| Other noninterest-bearing liabilities |
4,745 | 179,033 | ||||||||||||||||||||||
| Total liabilities |
1,878,810 | 1,551,665 | ||||||||||||||||||||||
| Shareholders' equity |
226,731 | 204,664 | ||||||||||||||||||||||
| Total liabilities and shareholders' equity |
$ | 2,105,541 | $ | 1,756,329 | ||||||||||||||||||||
| Net interest income (tax-equivalent basis) (Non-GAAP) (1) |
$ | 45,975 | $ | 37,564 | ||||||||||||||||||||
| Net interest margin (tax-equivalent basis) (Non-GAAP) (1) |
3.10 | % |
3.42 | % |
||||||||||||||||||||
| Reconciliation to Reported Net Interest Income |
||||||||||||||||||||||||
| Net interest income (tax-equivalent basis) (Non-GAAP) (1) |
$ | 45,975 | $ | 37,564 | ||||||||||||||||||||
| Adjustment for taxable equivalent interest |
(1,079 | ) | (485 | ) | ||||||||||||||||||||
| Net interest income (GAAP) |
$ | 44,896 | $ | 37,079 | ||||||||||||||||||||
| Net interest margin (GAAP) |
3.18 | % |
3.56 | % |
||||||||||||||||||||
|
|
(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. |
Table 2 – Changes in Tax-Equivalent Net Interest Income
| Three Months Ended September 30, |
||||||||||||
| (Dollars in thousands) |
2021 Over 2020 |
|||||||||||
| Total |
Volume |
Rate |
||||||||||
| Increase (decrease) in interest income (1) |
||||||||||||
| Loans (2) |
$ | (640 | ) | $ | (4,428 | ) | $ | 3,788 | ||||
| Taxable securities |
1,672 | 3,034 | (1,362 | ) | ||||||||
| Nontaxable securities (2) |
691 | 1,427 | (736 | ) | ||||||||
| Other |
(2 | ) | (22 | ) | 20 | |||||||
| Net change in interest income |
1,721 | 11 | 1,710 | |||||||||
| Increase (decrease) in interest expense (1) |
||||||||||||
| Interest-bearing demand deposits |
57 | 407 | (350 | ) | ||||||||
| Savings deposits |
28 | 69 | (41 | ) | ||||||||
| Certificates of deposit |
(194 | ) | (23 | ) | (171 | ) | ||||||
| Borrowings |
(42 | ) | (267 | ) | 225 | |||||||
| Subordinated debentures |
88 | 170 | (82 | ) | ||||||||
| Net change in interest expense |
(63 | ) | 356 | (419 | ) | |||||||
| Net change in tax-equivalent net interest income |
$ | 1,784 | $ | (345 | ) | $ | 2,129 | |||||
| Nine Months Ended September 30, |
||||||||||||
| (Dollars in thousands) |
2021 Over 2020 |
|||||||||||
| Total |
Volume |
Rate |
||||||||||
| Increase (decrease) in interest income (1) |
||||||||||||
| Loans (2) |
$ | 2,541 | $ | 2,567 | $ | (26 | ) | |||||
| Taxable securities |
2,510 | 4,358 | (1,848 | ) | ||||||||
| Nontaxable securities (2) |
2,839 | 3,337 | (498 | ) | ||||||||
| Other |
(171 | ) | 61 | (232 | ) | |||||||
| Net change in interest income |
7,719 | 10,323 | (2,604 | ) | ||||||||
| Increase (decrease) in interest expense (1) |
||||||||||||
| Interest-bearing demand deposits |
(30 | ) | 628 | (658 | ) | |||||||
| Savings deposits |
210 | 128 | 82 | |||||||||
| Certificates of deposit |
(853 | ) | 103 | (956 | ) | |||||||
| Borrowings |
(209 | ) | (390 | ) | 181 | |||||||
| Subordinated debentures |
190 | 214 | (24 | ) | ||||||||
| Net change in interest expense |
(692 | ) | 683 | (1,375 | ) | |||||||
| Net change in tax-equivalent net interest income |
$ | 8,411 | $ | 9,640 | $ | (1,229 | ) | |||||
|
|
(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%. |
Net Interest Income
Tax-equivalent net interest income increased $1.8 million in the third quarter and $8.4 million in the first nine months of 2021 compared to the same periods in 2020. This was partially due to $1.6 million in PPP loan fees recognized during the third quarter and $4.0 million in PPP loan fees recognized in the first nine months of 2021 and the impact of the Community Shores merger. Net interest margin on a tax-equivalent basis declined by 32 basis points in both the three and nine months ended September 30, 2021, to 3.06% and 3.10% respectively, compared to the same periods in the prior year due to a lower interest rate environment and a higher percentage of securities to total assets.
The average balance of loans increased $74.0 million in the first nine months of 2021 compared to the same period in 2020. Much of the increase was due to $173.9 million of loan growth related to the merger with Community Shores which closed on July 1, 2020. This was offset by PPP balances declining $76.8 million in the first nine months of 2021. The increase in average loan balance caused tax-equivalent interest income from loans to increase $2.5 million in the first nine months of 2021 compared to the same period in the prior year. The average balance of total securities increased $431.1 million in the first nine months of 2021 compared to the same period in 2020. The securities portfolio has grown as ChoiceOne has deployed excess deposit dollars into sufficiently short-term securities to allow loans to grow organically as good credits become available. The effect of the average balance growth, partially offset by a combined 45 basis point reduction in the average rate earned on securities, caused tax-equivalent securities income to increase $5.3 million in the first nine months of 2021 compared to the same period in 2020.
Growth of $360.2 million in the average balance of interest-bearing demand deposits and savings deposits, partially offset by a combined 7 basis point decrease in the average rate paid, caused interest expense to be $180,000 higher in the first nine months of 2021 compared to the first nine months of the prior year. The average balance of certificates of deposit increased $7.1 million in the first nine months of 2021 compared to the same period in 2020. The growth was offset by a reduction of 65 basis points in the average rate paid on certificates which caused interest expense to decrease $853,000 in the first nine months of 2021 compared to the same period in 2020. Part of the increase in the average balance of deposits was due to the merger with Community Shores which closed on July 1, 2020 and created interest bearing deposit growth of $162.3 million. In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. ChoiceOne used a portion of the proceeds from the private placement to payoff $2.6 million of other outstanding debt during the third quarter of 2021. 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. A reduction of $18.3 million in the average balance of borrowings in the first nine months of 2021 compared to the same period in the prior year caused interest expense to decline $209,000.
Provision and Allowance for Loan Losses
The provision for loan losses was $0 in the third quarter and $416,000 in the first nine months of 2021, compared to $1,225,000 and $3,000,000 in the same periods in the prior year. The provision in the third quarter and first nine months of 2021 was deemed prudent based on our assessment of the probable estimated losses inherent in the loan portfolio. 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 $868,000 and $1.9 million during the three and nine months ended September 30, 2021, respectively. The specific allowance for loan losses for impaired loans increased by $121,000 and $52,000 during the three and nine months ended September 30, 2021 as the loans being evaluated had a higher risk of loss based on management's judgement than impaired loans at June 30, 2021 and December 31, 2020.
Loans that were collectively analyzed for impairment decreased by $14.0 million and $75.3 million during the three and nine months ended September 30, 2021 as a result of forgiveness of PPP loans of $48.7 million and $76.8 million during the same time periods. As PPP loans are 100% government guaranteed and carry no allowance, the general allocation for loan losses not considered impaired decreased by $316,000 and increased by $110,000 during the three and nine months ended September 30, 2021 as a result of loan growth excluding PPP loans during that time.
The determination of our loss factors is based, in part, upon our actual loss history adjusted for significant qualitative factors that, in management's judgment, affect the collectability of the portfolio as of the analysis date. ChoiceOne uses a rolling 20 quarter actual net charge-off history as the base for the computation.
Nonperforming loans were $6.3 million as of September 30, 2021, compared to $6.9 million as of June 30, 2021 and $8.2 million as of December 31, 2020. The allowance for loan losses was 0.78% of total loans at September 30, 2021, compared to 0.79% at June 30, 2021 and 0.71% at December 31, 2020. Loans acquired in the mergers with County and Community Shores were recorded at fair value and as a result do not have an allowance for loan losses allocated to them unless credit deteriorates subsequent to acquisition. ChoiceOne has $7.1 million in credit mark remaining on loans acquired in the mergers. If the credit mark associated with the loans acquired in the mergers were added to the allowance for loan losses, the total allowance for loan losses would have represented 1.50% of total loans at September 30, 2021, 1.53% at June 30, 2021 and 1.60% at December 31, 2020.
Charge-offs and recoveries for respective loan categories for the nine months ended September 30, 2021 and 2020 were as follows:
| (Dollars in thousands) |
2021 |
2020 |
||||||||||||||
| Charge-offs |
Recoveries |
Charge-offs |
Recoveries |
|||||||||||||
| Agricultural |
$ | - | $ | - | $ | - | $ | - | ||||||||
| Commercial and industrial |
195 | 80 | 46 | 2 | ||||||||||||
| Consumer |
244 | 168 | 242 | 156 | ||||||||||||
| Commercial real estate |
111 | 43 | 255 | 4 | ||||||||||||
| Construction real estate |
- | - | - | - | ||||||||||||
| Residential real estate |
- | 5 | 8 | 17 | ||||||||||||
| $ | 550 | $ | 296 | $ | 551 | $ | 179 | |||||||||
Net charge-offs were $195,000 and $254,000 in the third quarter and first nine months of 2021, respectively, compared to net charge-offs of $290,000 and $372,000 during the same periods in 2020. Net charge-offs on an annualized basis as a percentage of average loans were 0.03% in the first nine months of 2021 compared to 0.05% of average loans in the same period in the prior year. Management is aware that the economic climate in Michigan will continue to affect business and individual borrowers. Management believes that the COVID-19 pandemic will also have an impact in the remainder of 2021 and beyond and, accordingly, has maintained a qualitative allocation related to the COVID-19 pandemic in evaluating its allowance for loan losses. Management has worked and intends to continue to work with delinquent borrowers in an attempt to lessen the impact of the COVID-19 pandemic on ChoiceOne.
ChoiceOne has allocated approximately $1.4 million of its allowance for loan losses at September 30, 2021 compared to $2.2 million at December 31, 2020 to borrowers falling into industry classification codes that management believes to be highly or moderately affected by the pandemic, as follows:
|
Highly Affected
|
Moderately Affected
|
|
Accommodation
|
Ambulatory Health Care Services
|
|
Amusement, Gambling, and Recreation Industries
|
Educational Services
|
|
Food Services and Drinking Places
|
Merchant Wholesalers, Durable Goods
|
|
Performing Arts, Spectator Sports, and Related Industries
|
Merchant Wholesalers, Nondurable Goods
|
|
Rental and Leasing Services
|
Miscellaneous Store Retailers
|
|
Scenic and Sightseeing Transportation
|
Motion Picture and Sound Recording Industries
|
|
Transit and Ground Passenger Transportation
|
Real Estate
|
Loans highly affected and moderately affected based on their commercial industry category have been allocated an additional 25 basis points and 15 basis points, respectively. ChoiceOne has also allocated 15 basis points to all retail loan categories. It is noted that this allowance amount is in addition to the regularly calculated allowance based on risk rating and qualitative factors. These allocations have declined from their highest levels at December 31, 2020, as ChoiceOne has seen improvements in customer, industry, and economic conditions related to the effects of the pandemic. ChoiceOne will continue to monitor concentrations as part of its analysis on an ongoing basis. Management will continue to monitor charge-offs, changes in the level of nonperforming loans, changes within the composition of the loan portfolio and the impact of the COVID-19 pandemic, and it will adjust the provision and allowance for loan losses as determined to be necessary.
Noninterest Income
Total noninterest income declined $1.6 million and $2.0 million in the three and nine months ended September 30, 2021, respectively. Total noninterest income in the third quarter and first nine months of 2020 was bolstered by heightened levels of refinancing activity within ChoiceOne's mortgage portfolio, with gains on sales of loans $1.8 million and $2.6 million larger than in the third quarter and first nine months of 2020. Gains on sales of loans were also affected by a lower gain rate in 2021 than in 2020. Future originations will be affected by housing inventory as it continues to be less than demand in ChoiceOne's market areas. Customer service charges increased $196,000 and $1.0 million in the three and nine months ended September 30, 2021, respectively, compared to the same periods in the prior year. Prior year service charges were depressed by stay at home orders during the COVID-19 pandemic. Current year service charges also included the effect of a merger with Community Shores which closed on July 1, 2020.The stock market dipped sharply in March 2020 related to the COVID-19 pandemic which affected securities held by ChoiceOne. Since that time ChoiceOne has seen the value of equity investments held climb to pre-pandemic levels. The change in the market value of equity securities was $210,000 and $645,000 better in the three months and nine months ended September 30, 2021, when compared to the same periods in the prior year. It is also noted that ChoiceOne performed a restructure of its security portfolio in the second quarter of 2020 which provided $1.3 million of additional noninterest income.
Noninterest Expense
Total noninterest expense declined $1.0 million in the third quarter of 2021 and increased $2.0 million in the first nine months of 2021 compared to the same time periods in 2020. The decrease during the third quarter of 2021 was due to savings on salaries of personnel, data processing, and professional fees related to the merger with Community Shores. Much of the increase in the first nine months of 2021 was caused by the increase in scale related to the merger with Community Shores.
Income Tax Expense
Income tax expense was $3,337,000 in the first nine months of 2021 compared to $2,460,000 for the same period in 2020. The increase was due to a higher level of income before income tax. The effective tax rate was 16.4% for the first nine months of 2021 and 17.6% for the first nine months of 2020. The small decline in the effective tax rate resulted from increased interest income from tax-exempt securities in 2021 compared to 2020.
FINANCIAL CONDITION
Securities
In an effort to deploy deposit growth, ChoiceOne grew its securities portfolio $172.6 million in the third quarter of 2021 and $458.9 million in the twelve months ended September 30, 2021. During the third quarter of 2021, ChoiceOne agreed to become a limited partner in Banktech Ventures LP, a venture capital fund that specializes in connecting and accelerating bank technology-focused startups. Management believes its investments are sufficiently short-term to allow loans to grow organically as good credits become available. Various securities totaling $514.2 million were purchased in the first nine months of 2021. There were no sales in the first nine months of 2021; however, $10.5 million of securities were called or matured during that same time period. Principal repayments on securities totaled $29.3 million in the first nine months of 2021.
Loans
Excluding PPP loans forgiven during the quarter, ChoiceOne grew loans organically by $32.5 million during the third quarter of 2021 due in part to new experienced lenders and an emphasis on organic loan growth during 2021. In the third quarter and first nine months of 2021, $48.7 million and $164.5 million of PPP loans were forgiven resulting in $1.6 million and $4.0 million of fee income, respectively. $2.4 million in PPP fee income remained deferred on $61.2 million in PPP loans outstanding at September 30, 2021. During the third quarter and first nine months of 2021, ChoiceOne recorded accretion income in the amount of $253,000 and $924,000, respectively. The remaining credit mark on acquired loans from the recent mergers with County Bank Corp. and Community Shores totaled $7.1 million as of September 30, 2021. ChoiceOne saw declines of $86.3 million in commercial and industrial loans and $22.2 million in residential real estate loans since the end of 2020. ChoiceOne saw an increase to agricultural loans of $9.7 million and commercial real estate loans of $16.1 million during the first nine months of 2021. The other changes resulted from normal fluctuations in borrower activity.
Asset Quality
Information regarding impaired loans can be found in Note 3 to the consolidated financial statements included in this report. The total balance of loans classified as impaired was $6.0 million at September 30, 2021, compared to $6.8 million as of June 30, 2021 and $7.9 million as of December 31, 2020. The change in the first nine months of 2021 was primarily comprised of a decrease of $2.8 million in impaired commercial real estate impaired loans and a $1.4 million decline in commercial and industrial impaired loans offset by a $2.7 million increase in agricultural impaired loans.
As part of its review of the loan portfolio, management also monitors the various nonperforming loans. Nonperforming loans are comprised of: (1) loans accounted for on a nonaccrual basis; (2) loans, not included in nonaccrual loans, which are contractually past due 90 days or more as to interest or principal payments; and (3) loans, not included in nonaccrual or loans past due 90 days or more, which are considered troubled debt restructurings ("TDRs").
The balances of these nonperforming loans were as follows:
| (Dollars in thousands) |
September 30, |
December 31, |
||||||
| 2021 |
2020 |
|||||||
| Loans accounted for on a nonaccrual basis |
$ | 1,731 | $ | 6,707 | ||||
| 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 |
4,610 | 1,537 | ||||||
| Total |
$ | 6,341 | $ | 8,244 | ||||
The reduction in the balance of nonaccrual loans in the first nine months of 2021 was primarily due to loans that were paid off. The increase in the TDR loans balance in the first nine months of 2021 was primarily due to a $2.2 million increase in TDR agricultural loans. 97% of loans considered TDRs were performing according to their restructured terms as of September 30, 2021. Management believes the allowance for loan losses allocated to its nonperforming loans is sufficient at September 30, 2021.
In March of 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed into law. Among other things, the CARES Act provides that certain loans subject to modifications related to the COVID-19 pandemic need not be classified as TDRs. Further, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” on March 22, 2020, followed by a revised statement on April 7, 2020, providing in part that short-term modifications to loans made on a good faith basis to borrowers who were current as of the implementation date of the statements are not considered TDRs. As a result of the pandemic, ChoiceOne provided a modification program to borrowers that included certain concessions such as interest only payments or payment deferrals. As of September 30, 2021, all deferments had resumed payments in accordance with loan terms.
Goodwill
Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit's fair value. Accounting pronouncements allow a company to first perform a qualitative assessment for goodwill prior to a quantitative assessment (Step 1 assessment). If the results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative assessment must be performed. If not, there is no further assessment required. ChoiceOne acquired Valley Ridge Financial Corp. in 2006, County in 2019, and Community Shores in 2020, which resulted in the recognition of goodwill of $13.7 million, $38.9 million and $7.3 million, respectively.
Management performed its annual qualitative assessment of goodwill as of June 30, 2021. In evaluating whether it is more likely than not that the fair value of ChoiceOne's operations was less than the carrying amount, management assessed the relevant events and circumstances such as the ones noted in ASC 350-20-35-3c. The analysis consisted of a review of ChoiceOne’s current and expected future financial performance, the potential impact of the COVID-19 pandemic on the ability of ChoiceOne’s borrowers to comply with loan terms, and the impact that reductions in both short-term and long-term interest rates have had and may continue to have on net interest margin and mortgage sales activity. The share price and book value of ChoiceOne’s stock were also compared to the prior year. Management also compared average deal values for recent closed bank transactions to ChoiceOne transactions. Despite ChoiceOne's market capitalization declining slightly from November 30, 2020 to June 30, 2021, ChoiceOne's financial performance remained positive. In assessing the totality of the events and circumstances, management determined that it was more likely than not that the fair value of ChoiceOne’s operations, from a qualitative perspective, exceeded the carrying value as of June 30, 2021 and impairment of goodwill was not necessary.
ChoiceOne’s stock price per share was less than its book value as of September 30, 2021. This indicated that goodwill may be impaired and resulted in management performing another qualitative goodwill impairment assessment as of the end of the third quarter of 2021. As a result of the analysis, management concluded that it was more-likely-than-not that the fair value of the reporting unit was greater than the carrying value. This was evidenced by the strong financial indicators, solid credit quality ratios, as well as the strong capital position of ChoiceOne. In addition, revenue in the first nine months of 2021 reflected significant and continuing growth in ChoiceOne's interest income, as well as net Small Business Administration fees related to Paycheck Protection Program loans. Based on the results of the qualitative analysis, management believed that a quantitative analysis was not necessary as of September 30, 2021.
Deposits and Borrowings
Total deposits increased $131.4 million in the third quarter and $337.6 million in the first nine months of 2021. The change in checking and savings accounts was due in part to funds related to the stimulus package included in the CARES Act as well as funds on deposit from the PPP loans that were not fully utilized as of September 30, 2021.
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 intends to use net proceeds of the private placement for general corporate purposes, including support for organic growth plans, possible redemption of senior debt, common stock repurchases, and support for bank-level capital ratios. ChoiceOne used a portion of the proceeds from the private placement to pay off $2.6 million other outstanding debt during the third quarter of 2021. ChoiceOne also holds $3.1 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. ChoiceOne may use Federal Home Loan Bank advances and advances from the Federal Reserve Bank Discount Window to meet short-term funding needs if needed in the remainder of 2021.
Shareholders' Equity
Regulatory Capital Requirements
Following is information regarding compliance of ChoiceOne and the Bank with regulatory capital requirements:
| Minimum Required |
||||||||||||||||||||||||
| to be Well |
||||||||||||||||||||||||
| Minimum Required |
Capitalized Under |
|||||||||||||||||||||||
| for Capital |
Prompt Corrective |
|||||||||||||||||||||||
| (Dollars in thousands) |
Actual |
Adequacy Purposes |
Action Regulations |
|||||||||||||||||||||
| Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
|||||||||||||||||||
| September 30, 2021 |
||||||||||||||||||||||||
| ChoiceOne Financial Services Inc. |
||||||||||||||||||||||||
| Total capital (to risk weighted assets) |
203,631 | 15.4 | % |
105,925 | 8.0 | % |
N/A | N/A | ||||||||||||||||
| Common equity Tier 1 capital (to risk weighted assets) weighted assets) |
158,876 | 12.0 | 59,583 | 4.5 | N/A | N/A | ||||||||||||||||||
| Tier 1 capital (to risk weighted assets) |
163,376 | 12.3 | 79,444 | 6.0 | N/A | N/A | ||||||||||||||||||
| Tier 1 capital (to average assets) |
163,376 | 7.5 | 86,989 | 4.0 | N/A | N/A | ||||||||||||||||||
| ChoiceOne Bank |
||||||||||||||||||||||||
| Total capital (to risk weighted assets) |
177,095 | 13.4 | % |
105,716 | 8.0 | % |
132,146 | 10.0 | % |
|||||||||||||||
| Common equity Tier 1 capital (to risk weighted assets) weighted assets) |
169,340 | 12.8 | 59,465 | 4.5 | 85,895 | 6.5 | ||||||||||||||||||
| Tier 1 capital (to risk weighted assets) |
169,340 | 12.8 | 79,287 | 6.0 | 105,716 | 8.0 | ||||||||||||||||||
| Tier 1 capital (to average assets) |
169,340 | 7.8 | 86,886 | 4.0 | 108,608 | 5.0 | ||||||||||||||||||
| December 31, 2020 |
||||||||||||||||||||||||
| ChoiceOne Financial Services Inc. |
||||||||||||||||||||||||
| Total capital (to risk weighted assets) |
$ | 162,558 | 13.2 | % |
$ | 98,835 | 8.0 | % |
N/A | N/A | ||||||||||||||
| Common equity Tier 1 capital (to risk weighted assets) weighted assets) |
150,465 | 12.2 | 55,595 | 4.5 | N/A | N/A | ||||||||||||||||||
| Tier 1 capital (to risk weighted assets) |
150,465 | 12.2 | 74,126 | 6.0 | N/A | N/A | ||||||||||||||||||
| Tier 1 capital (to average assets) |
150,465 | 8.3 | 72,281 | 4.0 | N/A | N/A | ||||||||||||||||||
| ChoiceOne Bank |
||||||||||||||||||||||||
| Total capital (to risk weighted assets) |
$ | 159,684 | 12.9 | % |
$ | 98,683 | 8.0 | % |
$ | 123,353 | 10.0 | % |
||||||||||||
| Common equity Tier 1 capital (to risk weighted assets) weighted assets) |
152,091 | 12.3 | 55,409 | 4.5 | 80,180 | 6.5 | ||||||||||||||||||
| Tier 1 capital (to risk weighted assets) |
152,091 | 12.3 | 74,012 | 6.0 | 98,683 | 8.0 | ||||||||||||||||||
| Tier 1 capital (to average assets) |
152,091 | 8.4 | 72,208 | 4.0 | 90,259 | 5.0 | ||||||||||||||||||
Management reviews the capital levels of ChoiceOne and ChoiceOne Bank on a regular basis. In addition to paying off $2.6 million of other outstanding debt in the third quarter of 2021, $5.0 million of proceeds from the private placement of subordinated notes was downstreamed to the Bank during the third quarter of 2021 to strengthen its capital levels. The Board of Directors and management believe that the capital levels as of September 30, 2021 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.
Liquidity
Net cash provided by operating activities was $28.9 million for the nine months ended September 30, 2021 compared to net cash used of $20.3 million in the same period a year ago. The change was primarily due to a $5.5 million increase in income and $37.7 million higher net proceeds from loan sales in 2021 compared to 2020. Net cash used in investing activities was $398.6 million for the three quarters of 2021 compared to $98.0 million in the same period in 2020. ChoiceOne had $514.2 million of securities purchases and sold $0 of securities in the first three quarters of 2021 compared to $183.1 and $121.9 in the same period in the last year, respectively. A decline in net loan originations and payments led to cash provided of $78.0 million in the first three quarters of 2021 compared to cash used of $108.5 million in the same period during the prior year. Cash used in the prior year period related to loan originations was largely due to PPP loans. Net cash provided by financing activities was $350.0 million for the nine months ended September 30, 2021, compared to $176.6 million in the same period in the prior year. Higher growth of $133.6 million in deposits in the first three quarters of 2021, a $25.0 million increase in borrowings and $21.2 million less in net payments on borrowings contributed to the change.
ChoiceOne believes that the current level of liquidity is sufficient to meet ChoiceOne Bank's normal operating needs. This belief is based upon the availability of deposits from both the local and national markets, maturities of securities, normal loan repayments, income retention, federal funds purchased from correspondent banks, advances available from the Federal Home Loan Bank, and secured lines of credit available from the Federal Reserve Bank.
NON-GAAP FINANCIAL MEASURES
This report contains references to certain financial measures excluding tax-effected merger expenses, each of which is a financial measure that is not defined in U.S. generally accepted accounting principles (“GAAP”). Management believes these non-GAAP financial measures provide additional information that is useful to investors in helping to understand the underlying financial performance of ChoiceOne.
Non-GAAP financial measures have inherent limitations. Readers should be aware of these limitations and should be cautious with respect to the use of such measures. To compensate for these limitations, we use non-GAAP measures as comparative tools, together with GAAP measures, to assist in the evaluation of our operating performance or financial condition. Also, we ensure that these measures are calculated using the appropriate GAAP or regulatory components in their entirety and that they are computed in a manner intended to facilitate consistent period-to-period comparisons. ChoiceOne’s method of calculating these non-GAAP financial measures may differ from methods used by other companies. These non-GAAP financial measures should not be considered in isolation or as a substitute for those financial measures prepared in accordance with GAAP or in-effect regulatory requirements.
A reconciliation of these non-GAAP financial measures follows:
Non-GAAP Reconciliation
(Unaudited)
The non-GAAP measures presented in the table below reflect the adjustments of the reported U.S. GAAP results for significant items that management does not believe are reflective of ChoiceOne’s current and ongoing operations.
| Three Months Ended September 30, |
Nine Months Ended September 30, |
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| (In Thousands, Except Per Share Data) |
2021 |
2020 |
2021 |
2020 |
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| Income before income tax |
$ | 6,912 | $ | 4,614 | $ | 20,367 | $ | 13,973 | ||||||||
| Adjustment for pre-tax merger expenses |
- | 1,707 | - | 2,526 | ||||||||||||
| Adjusted income before income tax |
$ | 6,912 | $ | 6,321 | $ | 20,367 | $ | 16,499 | ||||||||
| Income tax expense |
$ | 1,163 | $ | 785 | $ | 3,337 | $ | 2,460 | ||||||||
| Tax impact of adjustment for pre-tax merger expenses |
- | 284 | - | 359 | ||||||||||||
| Adjusted income tax expense |
$ | 1,163 | $ | 1,069 | $ | 3,337 | $ | 2,819 | ||||||||
| Net income |
$ | 5,749 | $ | 3,829 | $ | 17,029 | $ | 11,513 | ||||||||
| Adjustment for pre-tax merger expenses, net of tax impact |
- | 1,423 | - | 2,167 | ||||||||||||
| Adjusted net income |
$ | 5,749 | $ | 5,252 | $ | 17,029 | $ | 13,680 | ||||||||
| Basic earnings per share |
$ | 0.75 | $ | 0.49 | $ | 2.20 | $ | 1.55 | ||||||||
| Effect of merger expenses, net of tax impact |
- | 0.18 | - | 0.29 | ||||||||||||
| Adjusted basic earnings per share |
$ | 0.75 | $ | 0.67 | $ | 2.20 | $ | 1.84 | ||||||||
| Diluted earnings per share |
$ | 0.75 | $ | 0.49 | $ | 2.20 | $ | 1.55 | ||||||||
| Effect of merger expenses, net of tax impact |
- | 0.18 | - | 0.29 | ||||||||||||
| Adjusted diluted earnings per share |
$ | 0.75 | $ | 0.67 | $ | 2.20 | $ | 1.84 | ||||||||
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 Principal Financial Officer, of the effectiveness of the design and operation of ChoiceOne’s disclosure controls and procedures as of September 30, 2021. Based on and as of the time of that evaluation, ChoiceOne’s management, including the Chief Executive Officer and Principal 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 September 30, 2021 that has materially affected, or that is reasonably likely to materially affect, ChoiceOne’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
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. In the belief of management, pending or current legal proceedings should not have a material effect on the consolidated financial condition of ChoiceOne.
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, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no unregistered sales of equity securities in the third quarter of 2021.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table provides information regarding ChoiceOne's purchases of its common stock during the quarter ended September 30, 2021.
| Total Number |
Maximum |
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| of Shares |
Number of |
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| Total Number |
Purchased as |
Shares that |
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| Number |
Average |
Part of a |
May Yet be |
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| of Shares |
Price Paid |
Publicly |
Purchased |
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| Period |
Purchased |
per Share |
Announced Plan |
Under the Plan (1) |
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| July 1 - July 31, 2021 |
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| Employee Transactions |
- | $ | - | - | ||||||||||||
| Repurchase Plan |
75,657 | $ | 24.84 | 75,657 | 198,756 | |||||||||||
| August 1 - August 31, 2021 |
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| Employee Transactions |
- | $ | - | - | ||||||||||||
| Repurchase Plan |
18,514 | $ | 24.52 | 18,514 | 180,242 | |||||||||||
| September 1 - September 30, 2021 |
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| Employee Transactions |
- | $ | - | - | ||||||||||||
| Repurchase Plan |
13,069 | $ | 25.23 | 13,069 | 167,173 | |||||||||||
(1) As of September 30, 2021, there are 167,173 shares remaining that may yet be purchased under approved plans. The repurchase plan was adopted and announced in April 2021. There was no stated expiration date. The plan authorized the repurchase of up to 390,114 shares, representing 5% of the total outstanding shares of common stock as of the date the plan was adopted.
Item 5. Other Information
None.
Item 6. Exhibits
The following exhibits are filed or incorporated by reference as part of this report:
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Restated Articles of Incorporation of ChoiceOne Financial Services, Inc. Previously filed as an exhibit to ChoiceOne’s Form 8-A filed February 4, 2020. Here incorporated by reference. |
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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.
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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. |
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| 4.2 |
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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 |
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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. | |
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Certification of Chief Executive Officer |
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Certification of Treasurer |
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Certification pursuant to 18 U.S.C. § 1350. |
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| 101.INS |
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Inline XBRL Instance Document |
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| 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) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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CHOICEONE FINANCIAL SERVICES, INC. |
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| Date: November 8, 2021 |
/s/ Kelly J. Potes |
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Kelly J. Potes |
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| Date: November 8, 2021 |
/s/ Thomas L. Lampen |
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Thomas L. Lampen |
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