Choiceone Financial Services Inc 10-Q for FY2021 Q1
Choiceone Financial Services Inc (COFS)
About this 10-Q
Choiceone Financial Services Inc filed this 10-Q on May 13, 2021, covering the quarter ended March 31, 2021 (FY2021 Q1).
Headline figures
Quarter ended March 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $2.5M
- up 9.4% from $2.28M a year earlier
- Net income
- $6.24M
- up 91.7% from net income of $3.25M a year earlier
- Diluted EPS
- $0.80
- up 77.8% from $0.45 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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| For the quarterly period ended |
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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 April 30, 2021, the Registrant had outstanding
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS
| March 31, | 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 March 31, 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 | ||||||||
| (Dollars in thousands, except per share data) | March 31, | |||||||
| 2021 | 2020 | |||||||
| Interest income | ||||||||
| Loans, including fees | $ | $ | ||||||
| Securities: | ||||||||
| Taxable | ||||||||
| Tax exempt | ||||||||
| Other | ||||||||
| Total interest income | ||||||||
| Interest expense | ||||||||
| Deposits | ||||||||
| Advances from Federal Home Loan Bank | ||||||||
| Other | ||||||||
| Total interest expense | ||||||||
| Net interest income | ||||||||
| Provision for loan losses | ||||||||
| Net interest income after provision for loan losses | ||||||||
| Noninterest income | ||||||||
| Customer service charges | ||||||||
| Insurance and investment commissions | ||||||||
| Gains on sales of loans | ||||||||
| Net gains (losses) on sales of securities | ||||||||
| Net gains on sales and write-downs of other assets | ||||||||
| Earnings on life insurance policies | ||||||||
| Trust income | ||||||||
| Change in market value of equity securities | ( | ) | ||||||
| Other | ||||||||
| Total noninterest income | ||||||||
| Noninterest expense | ||||||||
| Salaries and benefits | ||||||||
| Occupancy and equipment | ||||||||
| Data processing | ||||||||
| Professional fees | ||||||||
| Supplies and postage | ||||||||
| Advertising and promotional | ||||||||
| Intangible amortization | ||||||||
| FDIC insurance | ||||||||
| Other | ||||||||
| Total noninterest expense | ||||||||
| Income before income tax | ||||||||
| Income tax expense | ||||||||
| 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 | ||||||||
| (Dollars in thousands) | March 31, | |||||||
| 2021 | 2020 | |||||||
| Net income | $ | $ | ||||||
| Other comprehensive income: | ||||||||
| Changes in net unrealized gains(losses) on investment securities available for sale, net of tax benefit of and expense of for the three months ended March 31, 2021 and March 31, 2020, respectively. | ( | ) | ||||||
| Reclassification adjustment for realized (gain) loss on sale of investment securities available for sale included in net income, net of tax expense of and for the three months ended March 31, 2021 and March 31, 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 March 31
| Accumulated | ||||||||||||||||||||
| Common | Other | |||||||||||||||||||
| Stock and | Comprehensive | |||||||||||||||||||
| Number of | Paid in | Retained | Income/(Loss), | |||||||||||||||||
| (Dollars in thousands, except per share data) | Shares | Capital | Earnings | Net | Total | |||||||||||||||
| Balance, January 1, 2020 | $ | $ | $ | $ | ||||||||||||||||
| Net income | ||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||
| Shares issued | ||||||||||||||||||||
| Effect of employee stock purchases | ||||||||||||||||||||
| Stock options exercised and issued (1) | - | |||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Cash dividends declared ( per share) | ( | ) | ( | ) | ||||||||||||||||
| Balance, March 31, 2020 | $ | $ | $ | $ | ||||||||||||||||
| Balance, January 1, 2021 | $ | $ | $ | $ | ||||||||||||||||
| Net income | ||||||||||||||||||||
| Other comprehensive income | ( | ) | ( | ) | ||||||||||||||||
| Shares issued | ||||||||||||||||||||
| Effect of employee stock purchases | ||||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||
| Cash dividends declared ( per share) | ( | ) | ( | ) | ||||||||||||||||
| Balance, March 31, 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)
| Three Months Ended |
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| (Dollars in thousands) |
March 31, |
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| 2021 |
2020 |
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| Cash flows from operating activities: |
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| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash from operating activities: |
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| Provision for loan losses |
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| Depreciation |
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| Amortization |
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| Compensation expense on employee and director stock purchases, stock options, and restricted stock units |
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| Net gains on sales of securities |
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| Net change in market value of equity securities |
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| Gains on sales of loans |
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| Loans originated for sale |
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| Proceeds from loan sales |
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| Earnings on bank-owned life insurance |
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| (Gains)/losses on sales of other real estate owned |
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| Proceeds from sales of other real estate owned |
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| Costs capitalized to other real estate | ( |
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| Deferred federal income tax (benefit)/expense |
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| Net change in: |
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| Other assets |
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| Other liabilities |
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| Net cash (used in)/provided by operating activities |
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| Cash flows from investing activities: |
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| Maturities, prepayments and calls of securities available for sale |
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| Purchases of securities available for sale |
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| Loan originations and payments, net |
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| Additions to premises and equipment |
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| Net cash (used in)/provided by investing activities |
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| Cash flows from financing activities: |
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| Net change in deposits |
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| Payments on borrowings |
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| Issuance of common stock |
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| Cash dividends |
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| Net cash provided by/(used in) financing activities |
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| Net change in cash and cash equivalents |
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| Beginning cash and cash equivalents |
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| Ending cash and cash equivalents |
$ | $ | ||||||
| Supplemental disclosures of cash flow information: |
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| Cash paid for interest |
$ | $ | ||||||
| Cash paid for income taxes |
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| Loans transferred to other real estate owned |
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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 Combination) of the Notes to the Consolidated Financial Statements included in this report.
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 subsidiaries: ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency"), Lakestone Financial Services, Inc. ("Lakestone Financial"), and Community Shores Financial Services, Inc. (“Community Shores Financial”). 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 March 31, 2021 and December 31, 2020, the Consolidated Statements of Income for the three-month periods ended March 31, 2021 and March 31, 2020, the Consolidated Statements of Comprehensive Income for the three-month periods ended March 31, 2021 and March 31, 2020, the Consolidated Statements of Changes in Shareholders’ Equity for the three-month periods ended March 31, 2021 and March 31, 2020, and the Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2021 and March 31, 2020. Operating results for the three months ended March 31, 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 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 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 subject to concentration risk to
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). At March 31, 2021,
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 is an estimate based on reviews of individual loans, assessments of the impact of current economic conditions on the portfolio and historical loss experience of seasoned loan portfolios. See Note 3 to the interim consolidated financial statements for additional information.
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 the balance sheets as well as 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. The Company acquired Valley Ridge Financial Corp. in 2006, County in 2019, and Community Shores in 2020, which resulted in the recognition of goodwill of $
As a result of the decline in economic conditions triggered by the COVID-19 pandemic, the market valuations, including ChoiceOne’s stock price, saw a significant decline in March 2020. These events indicated that goodwill may be impaired and resulted in management performing a qualitative goodwill impairment assessment as of the end of the first quarter of 2020. As a result of the analysis, management concluded that it was more-likely-than-not that the fair value of the reporting unit could be greater than its carrying amount. Based on the results of its qualitative analysis, management believed that a quantitative analysis was not necessary as of March 31, 2020.
Management performed its annual qualitative assessment of goodwill as of June 30, 2020. In evaluating whether it is more likely than not that the fair value of ChoiceOne's 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 COVID-19 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 December 2019 to June 2020, ChoiceOne's financial performance remained positive. This was evidenced by the strong financial indicators, solid credit quality ratios, as well as the strong capital position of ChoiceOne. In addition, second quarter 2020 revenue reflected significant and continuing growth in ChoiceOne's residential mortgage banking business, as well as net SBA fees related to Payroll Protection Program ("PPP") loans funded during the second quarter of 2020. In assessing the totality of the events and circumstances, management determined that it was more likely than not that the fair value of the Bank’s operations, from a qualitative perspective, exceeded the carrying value as of June 30, 2020
Due to the potential impact of COVID-19 and any long term economic fallout that might occur, ChoiceOne engaged a third-party valuation firm to perform a quantitative analysis of goodwill as of November 30, 2020 ("the valuation date"). In deriving at the fair value of the reporting unit (ChoiceOne), the third-party firm assessed general economic conditions and outlook; industry and market considerations and outlook; the impact of recent events to financial performance; the market price of ChoiceOne’s common stock and other relevant events. In addition, the valuation relied on financial projections through 2025 and growth rates prepared by management. Based on the valuation prepared, it was determined that the ChoiceOne's estimated fair value of the reporting unit at the valuation date was greater than its book value and impairment of goodwill was not required.
Despite ChoiceOne's market capitalization declining slightly from December 2020 to March 2021, ChoiceOne's financial performance remained positive. This was evidenced by the strong financial indicators, solid credit quality ratios, as well as the strong capital position of ChoiceOne. In addition, first quarter 2021 revenue reflected significant and continuing growth driven by ChoiceOne' mortgage banking business, as well as net SBA fees related to Payroll Protection Program ("PPP") loans.
Management concurred with the conclusion derived from the quantitative goodwill analysis performed as of the valuation date and determined that there were no material changes and that no triggering events have occurred that indicated impairment from the valuation date through March 31, 2021, and as a result that it is more likely than not that there was no goodwill impairment as of March 31, 2021.
During the first three months of 2021, management recorded two adjustment period entries to goodwill related to the merger with Community Shores. The net effect of the adjustments decreased goodwill by $
NOTE 2 – SECURITIES
The fair value of equity securities and the related gross unrealized gains (losses) recognized in noninterest income were as follows:
| March 31, 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:
| March 31, 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 | ||||||||||||||||
| Trust preferred securities | ||||||||||||||||
| 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 | ( | ) | ||||||||||||||
| Trust preferred securities | ||||||||||||||||
| 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 March 31, 2021, the fair value of securities as of March 31, 2021 and December 31, 2020, and the weighted average yields of securities as of March 31, 2021:
| Securities maturing within: | ||||||||||||||||||||||||
| Fair Value | Fair Value | |||||||||||||||||||||||
| Less than | 1 Year - | 5 Years - | More than | at March 31, | 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 | ||||||||||||||||||||||||
| Trust preferred securities | ||||||||||||||||||||||||
| 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 | ||||||||||||||||||||
| Trust preferred securities | ||||||||||||||||||||
| Asset-backed securities | ||||||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||||||
| Equity securities | ||||||||||||||||||||
Following is information regarding unrealized gains and losses on equity securities for the three-month periods ended March 31, 2021 and 2020:
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 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 March 31, 2021 | ||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provision | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Loans | ||||||||||||||||||||||||||||||||
| March 31, 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 March 31, 2020 | ||||||||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||
| Provision | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Ending balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Loans | ||||||||||||||||||||||||||||||||
| March 31, 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 provision for loan losses was $
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 | |||||||||||||||||||||
| March 31, | December 31, | March 31, | December 31, | March 31, | 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 | |||||||||||||||||||||
| March 31, | December 31, | March 31, | December 31, | March 31, | 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 months ended March 31, 2021. There were
| Three Months Ended March 31, 2021 | ||||||||||||
| Pre- | Post- | |||||||||||
| Modification | Modification | |||||||||||
| Outstanding | Outstanding | |||||||||||
| (Dollars in thousands) | Number of | Recorded | Recorded | |||||||||
| Loans | Investment | Investment | ||||||||||
| Agricultural | $ | $ | ||||||||||
| Commercial Real Estate | ||||||||||||
| Total | $ | $ | ||||||||||
The following schedule provides information on TDRs as of March 31, 2021 where the borrower was past due with respect to principal and/or interest for 30 days or more during the three months ended March 31, 2021, which loans had been modified and classified as TDRs during the year prior to the default. There were no TDRs as of March 31, 2020 where the borrower was past due with respect to principal and/or interest for 30 days or more during the three months ended March 31, 2020, which loans had been modified and classified as TDRs during the year prior to the default.
| Three Months Ended | ||||||||
| March 31, 2021 | ||||||||
| (Dollars in thousands) | Number | Recorded | ||||||
| of Loans | Investment | |||||||
| Commercial and industrial | $ | |||||||
| 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, the Company provided a modification program to borrowers that included certain concessions such as interest only payments or payment deferrals. As of March 31, 2021, the Company had granted pandemic-related modifications on approximately
Impaired loans by loan category follow:
| Unpaid | ||||||||||||
| (Dollars in thousands) | Recorded | Principal | Related | |||||||||
| Investment | Balance | Allowance | ||||||||||
| March 31, 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-month periods ended March 31, 2021 and 2020:
| Average | Interest | |||||||
| (Dollars in thousands) | Recorded | Income | ||||||
| Investment | Recognized | |||||||
| Three Months Ended March 31, 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 March 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 | $ | $ | ||||||
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 | ||||||||||||||||||||||
| March 31, 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) | March 31, | 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 (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 three months ended March 31, 2021 (dollars in thousands):
| (Dollars in thousands) | Acquired | Acquired | Acquired | |||||||||
| Impaired | Non-impaired | Total | ||||||||||
| Balance, January 1, 2019 | $ | $ | $ | |||||||||
| Merger with County Bank Corp on October 1, 2019 | ||||||||||||
| Accretion October 1, 2019 through December 31, 2019 | ( | ) | ( | ) | ||||||||
| Balance, January 1, 2020 | ||||||||||||
| Accretion January 1, 2020 through December 31, 2020 | ( | ) | ( | ) | ( | ) | ||||||
| Balance, December 31, 2020 | ||||||||||||
| Accretion January 1, 2021 through March 31, 2021 | ( | ) | ( | ) | ( | ) | ||||||
| Balance, March 31, 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 (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 three months ended March 31, 2021 (dollars in thousands):
| 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 March 31, 2021 | ( | ) | ( | ) | ( | ) | ||||||
| Balance, March 31, 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 | ||||||||
| (Dollars in thousands, except share data) | March 31, | |||||||
| 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 stock options that were considered to be anti-dilutive to earnings per share for the three months ended March 31, 2021 or March 31, 2020.
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) | ||||||||||||||||
| March 31, 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 | ||||||||||||||||||||
| Borrowings | ||||||||||||||||||||
| 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 March 31, 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 - March 31, 2021 | ||||||||||||||||
| Equity securities | $ | $ | $ | $ | ||||||||||||
| Investment Securities, Available for Sale - March 31, 2021 | ||||||||||||||||
| U. S. Government and federal agency | $ | $ | $ | $ | ||||||||||||
| U. S. Treasury notes and bonds | ||||||||||||||||
| State and municipal | ||||||||||||||||
| Mortgage-backed | ||||||||||||||||
| Corporate | ||||||||||||||||
| Trust preferred securities | ||||||||||||||||
| 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 | ||||||||||||||||
| Trust preferred securities | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis
| Three Months Ended | ||||||||
| (Dollars in thousands) | March 31, | |||||||
| 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, March 31 | $ | $ | ||||||
| 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, March 31 | $ | $ | ||||||
Of the available for sale Level 3 assets that were held by ChoiceOne at March 31, 2021, the net unrealized gain as of March 31, 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 | ||||||||||||||||
| March 31, 2021 | $ | $ | $ | $ | ||||||||||||
| December 31, 2020 | $ | $ | $ | $ | ||||||||||||
| Other Real Estate | ||||||||||||||||
| March 31, 2021 | $ | $ | $ | $ | ||||||||||||
| December 31, 2020 | $ | $ | $ | $ | ||||||||||||
| Mortgage Loan Servicing Rights | ||||||||||||||||
| March 31, 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 | ||||||||
| March 31, | ||||||||
| (Dollars in thousands) | 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 COMBINATION
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 | ||||
| Trust preferred securities | ||||
| 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 global coronavirus (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. The COVID-19 pandemic is adversely affecting ChoiceOne and its customers, counterparties, employees, and third-party service providers. The ultimate extent of the impacts on ChoiceOne's business, financial position, results of operations, liquidity, and prospects is uncertain. 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. 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 first quarter of 2021 was $6,238,000, which represented an increase of $2,984,000 or 92% compared to the first quarter period in 2020. Growth in net income in the first quarter 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 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 quarter of 2021; however, net income was impacted by $282,000 of costs related to the merger with Community Shores in the first quarter of 2020. Net income, adjusted to exclude tax-effected merger-related expenses, would have been $3,536,000 in the first quarter of 2020.
Basic and diluted earnings per common share were $0.80 for the first quarter of 2021 compared to $0.45 or $0.49 adjusted to exclude the tax-effected merger-related expenses for the first quarter of the prior year. The return on average assets and return on average shareholders’ equity percentages were 1.25% and 11.13%, respectively, for the first quarter of 2021, compared to 0.93% and 6.60%, respectively, for the same period in 2020.
Net income, basic earnings per share, 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.
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 Coronavirus (COVID-19) Outbreak
The coronavirus outbreak (COVID-19) has had a substantial impact on numerous aspects of life in the United States, including threats to public health, government imposed restrictions on business and gatherings, increased volatility in markets, and severe effects on national and local economies.
COVID-19 has affected ChoiceOne's customers. Although there were no material increases in delinquencies or net charge-offs in the first quarter of 2021, ChoiceOne recorded a provision for loan losses of $250,000 related to the impact of COVID-19. 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 COVID-19 and has granted approximately 750 payment deferrals on numerous loans to borrowers affected by the pandemic from March of 2020 through June of 2020. Following the initial 90 day deferment period, ChoiceOne offered a second round of deferment in accordance with the CARES act; however, significantly fewer customers requested further deferment. As of March 31, 2021, approximately 17 deferments remained active with loan balances totaling $1.2 million with all other previous deferments resuming their payments in accordance with loan terms.
In addition, ChoiceOne processed over $126 million in Paycheck Protection Program ("PPP") loans in 2020 and acquired an additional $37 million in PPP loans in the merger with Community Shores. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. PPP loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven in whole or in part. Payments are deferred until either the date on which the Small Business Administration ("SBA") remits the amount of forgiveness proceeds to the lender or the date that is ten months after the last day of the covered period if the borrower does not apply for forgiveness within that ten-month period. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. Upon SBA forgiveness, unrecognized fees are then recognized into interest income. In the first quarter of 2021, $56.4 million of Paycheck Protection Program (PPP) loans were forgiven resulting in $1.4 million of fee income. Another round of PPP loans was offered in the first quarter of 2021. ChoiceOne added 718 PPP loans to its portfolio in the first quarter of 2021 with a balance of $76.7 million. Fee income related to new PPP loans amounted to $3.7 million, of which $208,000 was recognized in the first quarter of 2021.
Dividends
Cash dividends of $1,716,000 or $0.22 per share were declared in the first quarter of 2021, compared to $1,449,000 or $0.20 per share declared in the first quarter of 2020. The cash dividend payout percentage was 28% for the first quarter of 2021, compared to 45% 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-month periods ended March 31, 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 March 31, |
||||||||||||
| 2021 |
2020 |
|||||||||||
| (Dollars in thousands) |
Average |
Average |
||||||||||
| Balance |
Interest |
Rate |
Balance |
Interest |
Rate |
|||||||
| Assets: |
||||||||||||
| Loans (1) |
$ 1,080,181 |
$ 12,687 |
4.70 |
% |
$ 830,107 |
$ 10,081 |
4.86 |
% |
||||
| Taxable securities (2) |
438,575 |
1,856 |
1.69 |
239,104 |
1,857 |
3.11 |
||||||
| Nontaxable securities (1) |
201,228 |
1,390 |
2.76 |
113,130 |
467 |
1.65 |
||||||
| Other |
84,822 |
20 |
0.09 |
54,451 |
194 |
1.43 |
||||||
| Interest-earning assets |
1,804,806 |
15,953 |
3.54 |
1,236,792 |
12,599 |
4.07 |
||||||
| Noninterest-earning assets |
184,954 |
170,324 |
||||||||||
| Total assets |
$ 1,989,760 |
$ 1,407,116 |
||||||||||
| Liabilities and Shareholders' Equity: |
||||||||||||
| Interest-bearing demand deposits |
$ 715,868 |
$ 429 |
0.24 |
% |
$ 502,240 |
$ 656 |
0.52 |
% |
||||
| Savings deposits |
355,395 |
114 |
0.13 |
213,108 |
40 |
0.08 |
||||||
| Certificates of deposit |
195,093 |
337 |
0.69 |
179,076 |
689 |
1.54 |
||||||
| Borrowings |
8,462 |
36 |
1.70 |
26,956 |
138 |
2.05 |
||||||
| Subordinated debentures |
3,099 |
52 |
6.65 |
- |
- |
0.00 |
||||||
| Interest-bearing liabilities |
1,277,917 |
968 |
0.30 |
921,380 |
1,523 |
0.66 |
||||||
| Demand deposits |
479,649 |
279,905 |
||||||||||
| Other noninterest-bearing liabilities |
7,937 |
8,719 |
||||||||||
| Total liabilities |
1,765,503 |
1,210,004 |
||||||||||
| Shareholders' equity |
224,257 |
197,112 |
||||||||||
| Total liabilities and shareholders' equity |
$ 1,989,760 |
$ 1,407,116 |
||||||||||
| Net interest income (tax-equivalent basis) (Non-GAAP) (1) |
$ 14,985 |
$ 11,076 |
||||||||||
| Net interest margin (tax-equivalent basis) (Non-GAAP) (1) |
3.23 |
% |
3.42 |
% |
||||||||
| Reconciliation to Reported Net Interest Income |
||||||||||||
| Net interest income (tax-equivalent basis) (Non-GAAP) (1) |
$ 14,985 |
$ 11,076 |
||||||||||
| Adjustment for taxable equivalent interest |
(297) |
(105) |
||||||||||
| Net interest income (GAAP) |
$ 14,688 |
$ 10,971 |
||||||||||
| Net interest margin (GAAP) |
3.32 |
% |
3.58 |
% |
||||||||
|
|
(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. |
Table 2 – Changes in Tax-Equivalent Net Interest Income
| Three Months Ended March 31, |
|||||
| (Dollars in thousands) |
2021 Over 2020 |
||||
| Total |
Volume |
Rate |
|||
| Increase (decrease) in interest income (1) |
|||||
| Loans (2) |
$ 2,606 |
$ 4,769 |
$ (2,163) |
||
| Taxable securities |
(1) |
4,383 |
(4,384) |
||
| Nontaxable securities (2) |
923 |
495 |
428 |
||
| Other |
(174) |
479 |
(653) |
||
| Net change in interest income |
3,354 |
10,126 |
(6,772) |
||
| Increase (decrease) in interest expense (1) |
|||||
| Interest-bearing demand deposits |
(227) |
1,142 |
(1,369) |
||
| Savings deposits |
74 |
39 |
35 |
||
| Certificates of deposit |
(352) |
376 |
(728) |
||
| Borrowings |
(102) |
(82) |
(20) |
||
| Subordinated debentures |
52 |
52 |
- |
||
| Net change in interest expense |
(555) |
1,527 |
(2,082) |
||
| Net change in tax-equivalent net interest income |
$ 3,909 |
$ 8,599 |
$ (4,690) |
||
|
|
(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 $3.9 million in the first three months of 2021 compared to the same period in 2020 partially due to $1.6 million in PPP loan fees recognized during the first quarter of 2021, partially offset by a reduction in ChoiceOne’s net interest margin. Net interest margin on a tax-equivalent basis declined by 19 basis points from 3.42% in the first quarter of 2020 to 3.23% in the same period in 2021.
The average balance of loans increased $250.1 million in the first quarter of 2021 compared to the same period in 2020. $174.8 million of the increase was due to the impact of the merger with Community Shores which closed on July 1, 2020 with the remaining increase due to PPP loans which were originated after the first quarter of 2020. The increase in the average loans balance was partially offset by a 16 basis points decline in the average rate earned. Part of the decrease was caused by short-term market interest rates which were reduced 150 basis points by the Federal Open Market Committee in March 2020. PPP loans with an interest rate of 1.00% also reduced the overall rate earned on loans during the first quarter of 2021. The combination of these factors caused tax-equivalent interest income from loans to increase $2.6 million in the first quarter of 2021 compared to the same period in the prior year. The average balance of total securities increased $287.6 million in the first quarter 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 61 basis point reduction in the average rate earned on securities, caused tax-equivalent securities income to increase $922,000 in the first quarter of 2021 compared to the same quarter in 2020.
Growth of $355.9 million in the average balance of interest-bearing demand deposits and savings deposits, partially offset by a 19 basis point decrease in the average rate paid, caused interest expense to be $153,000 lower in the first three months of 2021 compared to the first three months of the prior year. The average balance of certificates of deposit increased $16.0 million in the first three months of 2021 compared to the same period in 2020. The growth was overshadowed by a reduction of 85 basis points in the average rate paid on certificates which caused interest expense to decrease $352,000 in the first three months of 2021 compared to the same period in 2020.
Provision and Allowance for Loan Losses
The provision for loan losses was $250,000 in the first quarter 2021, compared to $775,000 in the same period in the prior year. The provision in the first quarter of 2021 was deemed prudent due to changes in the risk profile of ChoiceOne’s loan portfolio and the economic impact on ChoiceOne's local market areas and the national economy resulting from the COVID-19 pandemic. Nonperforming loans were $10.0 million as of March 31, 2021, compared to $8.2 million as of December 31, 2020. The allowance for loan losses was 0.75% of total loans at March 31, 2021, compared to 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. If the credit mark associated with the loans acquired in the mergers were added to the allowance for loan losses, the total would have represented 1.52% of total loans at March 31, 2021.
Charge-offs and recoveries for respective loan categories for the three months ended March 31, 2021 and 2020 were as follows:
| (Dollars in thousands) |
2021 |
2020 |
||||||||||||||
| Charge-offs |
Recoveries |
Charge-offs |
Recoveries |
|||||||||||||
| Agricultural |
$ | - | $ | - | $ | - | $ | - | ||||||||
| Commercial and industrial |
74 | 9 | - | 1 | ||||||||||||
| Consumer |
71 | 79 | 89 | 44 | ||||||||||||
| Commercial real estate |
48 | - | - | - | ||||||||||||
| Construction real estate |
- | - | - | - | ||||||||||||
| Residential real estate |
- | 2 | - | 2 | ||||||||||||
| $ | 193 | $ | 90 | $ | 89 | $ | 47 | |||||||||
Net charge-offs were $102,000 in the first quarter of 2021, compared to net charge-offs of $42,000 during the same period in 2020. Net charge-offs on an annualized basis as a percentage of average loans were 0.04% in the first three months of 2021 compared to annualized net charge-offs of 0.02% 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 COVID-19 will also have an impact in the remainder of 2021 and beyond. Management has worked and intends to continue to work with delinquent borrowers in an attempt to lessen the impact of COVID-19 on ChoiceOne.
ChoiceOne has allocated approximately $2.1 million in the allowance for loan losses to borrowers falling into industry classification codes that management believes to be highly or moderately affected by the pandemic. The following chart indicates industries management believes to be moderately or highly effected by the pandemic:
|
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 35 basis points and 25 basis points, respectively. ChoiceOne has also allocated 25 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. 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 COVID-19, and it will adjust the provision and allowance for loan losses as determined to be necessary.
Noninterest Income
Total noninterest income increased $1.5 million in the first quarter of 2021 compared to the same period in 2020. While increased scale was a factor, most of the increase was related to a difference in the change in the market value of equity securities from a negative $389,000 in the first quarter of 2020 to a positive $608,000 in the first quarter of 2021. 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. Mortgage activity continued to remain strong with an increase of $403,000 in gains on sales of loans in the first quarter of 2021 compared to the same period in 2020, as lower interest rates continued to encourage refinancing activity. Insurance and investment commissions increased $147,000 in the first quarter of 2021 compared to the same period in 2020, due in part to the addition of Community Shores Financial Services Inc., a wholly owned subsidiary acquired during the merger with Community Shores.
Noninterest Expense
Total noninterest expense increased $2.1 million in the first quarter of 2021 compared to the same period in 2020. All categories included expenses as a result of the merger with Community Shores that was effective on July 1, 2020. Salaries and benefits included a higher level of commission expense in the first quarter of 2021 compared to the same period in the prior year as a result of the significant increase in residential mortgage loan originations. Data processing expense declined in the first quarter of 2021 as compared to the same period in 2020, as the prior year included some conversion expenses from ChoiceOne's merger with County, which closed on October 1, 2019. Supplies and postage also declined in the first quarter of 2021 compared the same period in the prior year as ChoiceOne continues to move mailings digital when applicable. The intangible amortization expense in 2021 represented the amortization of the core deposit intangible that resulted from the mergers with County and Community Shores.
Income Tax Expense
Income tax expense was $1,272,000 in the first quarter of 2021 compared to $625,000 for the same period in 2020. The increase was due to a higher level of income before income tax. The effective tax rate was 16.9% for the first quarter of 2021 and 16.1% for the first quarter of 2020.
FINANCIAL CONDITION
Securities
Total securities increased $148.7 million from December 31, 2020 to March 31, 2021. Various securities totaling $179.2 million were purchased in the first three months of 2021. There were no sales in the first three months of 2021; however, $2.6 million of securities called or matured during that same time period. Principal repayments on securities totaled $10.3 million in the first three months of 2021. ChoiceOne believes the portfolio will provide a natural hedge for floating rate loans and investments are sufficiently short-term to allow organic growth in loans as good credits become available.
Loans
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 $10.4 million at March 31, 2021, compared to $7.9 million as of December 31, 2020. The change in the first three months of 2021 was primarily comprised of an increase of $2.8 million in impaired agricultural loans in the first quarter of 2021.
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) |
March 31, |
December 31, |
||||||
| 2021 |
2020 |
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| Loans accounted for on a nonaccrual basis |
$ | 5,173 | $ | 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 |
4,807 | 1,537 | ||||||
| Total |
$ | 9,980 | $ | 8,244 | ||||
The increase in the TDR loans balance in the first three months of 2021 was primarily due to a $2.3 million increase in TDR agricultural loans. Approximately 70% of the balance of loans considered TDRs were performing according to their restructured terms as of March 31, 2021. Management believes the allowance for loan losses allocated to its nonperforming loans was sufficient at March 31, 2021.
In March of 2020, the 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, the Company provided a modification program to borrowers that included certain concessions such as interest only payments or payment deferrals. As of March 31, 2021, the Company had granted pandemic-related modifications on approximately 17 loans totaling $1.2 million which, in reliance on the statements of federal banking agencies and the CARES Act, are not reflected as TDRs in this report.
Goodwill
As a result of the decline in economic conditions triggered by the COVID-19 pandemic, the market valuations, including ChoiceOne’s stock price, saw a significant decline in March 2020. These events indicated that goodwill may be impaired and resulted in management performing a qualitative goodwill impairment assessment as of the end of the first quarter of 2020. As a result of the analysis, management concluded that it was more-likely-than-not that the fair value of the reporting unit could be greater than its carrying amount. Based on the results of its qualitative analysis, management believed that a quantitative analysis was not necessary as of March 31, 2020.
Management performed its annual qualitative assessment of goodwill as of June 30, 2020. In evaluating whether it is more likely than not that the fair value of ChoiceOne's 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 COVID-19 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 December 2019 to June 2020, ChoiceOne's financial performance remained positive. This was evidenced by the strong financial indicators, solid credit quality ratios, as well as the strong capital position of ChoiceOne. In addition, second quarter 2020 revenue reflected significant and continuing growth in ChoiceOne's residential mortgage banking business, as well as net SBA fees related to Payroll Protection Program ("PPP") loans funded during the second quarter of 2020. In assessing the totality of the events and circumstances, management determined that it was more likely than not that the fair value of the Bank’s operations, from a qualitative perspective, exceeded the carrying value as of June 30, 2020.
Due to the potential impact of COVID-19 and any long term economic fallout that might occur, ChoiceOne engaged a third-party valuation firm to perform a quantitative analysis of goodwill as of November 30, 2020 ("the valuation date"). In arriving at the fair value of the reporting unit (the Bank), the third-party firm assessed general economic conditions and outlook; industry and market considerations and outlook; the impact of recent events to financial performance; the market price of ChoiceOne’s common stock and other relevant events. In addition, the valuation relied on financial projections through 2025 and growth rates prepared by management. Based on the valuation prepared, it was determined that ChoiceOne's estimated fair value of the reporting unit at the valuation date was greater than its book value and impairment of goodwill was not required.
Despite ChoiceOne's market capitalization declining slightly from December 2020 to March 2021, ChoiceOne's financial performance remained positive. This was evidenced by the strong financial indicators, solid credit quality ratios, as well as the strong capital position of ChoiceOne. In addition, first quarter 2021 revenue reflected significant and continuing growth driven by ChoiceOne' mortgage banking business, as well as net SBA fees related to Payroll Protection Program ("PPP") loans.
Management concurred with the conclusion derived from the quantitative goodwill analysis performed as of the valuation date of November 30, 2020 and determined that there were no material changes and that no triggering events have occurred that indicated impairment from the valuation date through March 31, 2021, and as a result that it is more likely than not that there was no goodwill impairment as of March 31, 2021. During the first three months of 2021, management recorded two adjustment period entries to goodwill related to the merger with Community Shores. The net effect of the adjustments decreased goodwill by $560,000.
Deposits and Borrowings
Total borrowings declined $5.8 million in the first quarter 2021 as ChoiceOne made payments on its holding company term loan. ChoiceOne also holds $3.1 million in subordinated debentures obtained in the merger with Community Shores that represented a $4.5 million subordinated debt offering, 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 |
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| to be Well |
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| Minimum Required |
Capitalized Under |
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| for Capital |
Prompt Corrective |
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| (Dollars in thousands) |
Actual |
Adequacy Purposes |
Action Regulations |
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| Amount |
Ratio |
Amount |
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Amount |
Ratio |
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| March 31, 2021 |
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| ChoiceOne Financial Services Inc. |
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| Total capital (to risk weighted assets) |
168,338 | 13.5 | % |
99,581 | 8.0 | % |
N/A | N/A | ||||||||||||||||
| Common equity Tier 1 capital (to risk weighted assets) weighted assets) |
156,098 | 12.5 | 56,014 | 4.5 | N/A | N/A | ||||||||||||||||||
| Tier 1 capital (to risk weighted assets) |
156,098 | 12.5 | 74,686 | 6.0 | N/A | N/A | ||||||||||||||||||
| Tier 1 capital (to average assets) |
156,098 | 8.1 | 77,229 | 4.0 | N/A | N/A | ||||||||||||||||||
| ChoiceOne Bank |
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| Total capital (to risk weighted assets) |
163,242 | 13.1 | % |
99,430 | 8.0 | % |
124,288 | 10.0 | % |
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| Common equity Tier 1 capital (to risk weighted assets) weighted assets) |
155,502 | 12.5 | 55,930 | 4.5 | 80,787 | 6.5 | ||||||||||||||||||
| Tier 1 capital (to risk weighted assets) |
155,502 | 12.5 | 74,573 | 6.0 | 99,430 | 8.0 | ||||||||||||||||||
| Tier 1 capital (to average assets) |
155,502 | 8.1 | 77,144 | 4.0 | 96,430 | 5.0 | ||||||||||||||||||
| December 31, 2020 |
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| ChoiceOne Financial Services Inc. |
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| 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 |
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| Total capital (to risk weighted assets) |
$ | 159,684 | 12.9 | % |
$ | 98,683 | 8.0 | % |
$ | 123,353 | 10.0 | % |
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| 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. The Board of Directors and management believe that the capital levels as of March 31, 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 $2.2 million for the three months ended March 31, 2021 compared to net cash used of $2.5 million in the same period a year ago. The change was primarily due to $3.0 million more in net income in the current year than the prior year and a $2.9 million net positive change in other liabilities. Net cash used in investing activities was $104.3 million for the first three months of 2021 compared to $19.0 million used in the same period in 2020. $179.2 million of cash used to purchase securities was offset by cash provided of $63.1 million in net loan originations. Net cash provided by financing activities was $157.9 million in the three months ended March 31, 2021, compared to $7.4 million provided in the same period in the prior year. Higher growth of $165.4 million in deposits in the first quarter of 2021 compared to $18.8 million in the same quarter in the prior year was the main driver of the year over year 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 net income, basic earnings per share, and diluted earnings per share 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 March 31, |
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| (In Thousands, Except Per Share Data) |
2021 |
2020 |
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| Income before income tax |
$ | 7,510 | $ | 3,879 | ||||
| Adjustment for pre-tax merger expenses |
- | 302 | ||||||
| Adjusted income before income tax |
$ | 7,510 | $ | 4,181 | ||||
| Income tax expense |
$ | 1,272 | $ | 625 | ||||
| Tax impact of adjustment for pre-tax merger expenses |
- | 20 | ||||||
| Adjusted income tax expense |
$ | 1,272 | $ | 645 | ||||
| Net income |
$ | 6,238 | $ | 3,254 | ||||
| Adjustment for pre-tax merger expenses, net of tax impact |
- | 282 | ||||||
| Adjusted net income |
$ | 6,238 | $ | 3,536 | ||||
| Basic earnings per share |
$ | 0.80 | $ | 0.45 | ||||
| Effect of merger expenses, net of tax impact |
0.00 | 0.04 | ||||||
| Adjusted basic earnings per share |
$ | 0.80 | $ | 0.49 | ||||
| Diluted earnings per share |
$ | 0.80 | $ | 0.45 | ||||
| Effect of merger expenses, net of tax impact |
0.00 | 0.04 | ||||||
| Adjusted diluted earnings per share |
$ | 0.80 | $ | 0.49 | ||||
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 March 31, 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 March 31, 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 first quarter of 2021.
ISSUER PURCHASES OF EQUITY SECURITIES
There were no issuer purchases of equity securities during the first quarter of 2021.
Item 5. Other Information
None.
Item 6. Exhibits
The following exhibits are filed or incorporated by reference as part of this report:
| Exhibit |
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Agreement and Plan of Merger between ChoiceOne Financial Services, Inc. and County Bank Corp dated March 22, 2019. Previously filed as an exhibit to ChoiceOne’s Form 8-K filed March 25, 2019. Here incorporated by reference. |
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Agreement and Plan of Merger between ChoiceOne Financial Services, Inc. and Community Shores Bank Corporation dated January 6, 2020. Previously filed as an exhibit to ChoiceOne’s Form 8-K filed January 6, 2020. Here incorporated by reference. |
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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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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 |
| 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: May 13, 2021 |
/s/ Kelly J. Potes |
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Kelly J. Potes |
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| Date: May 13, 2021 |
/s/ Thomas L. Lampen |
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Thomas L. Lampen |
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