See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
(1) The amount shown represents the number of shares issued in cashless transactions where some taxes are netted on a portion of the exercises.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
Note 1 – Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include ChoiceOne Financial Services, Inc. ("ChoiceOne"), its wholly-owned subsidiary, ChoiceOne Bank (the "Bank"), and ChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency"). Intercompany transactions and balances have been eliminated in consolidation.
ChoiceOne owns all of the common securities of Community Shores Capital Trust I (the “Capital Trust”). Under U.S. generally accepted accounting principles ("GAAP"), the Capital Trust is not consolidated because it is a variable interest entity and ChoiceOne is not the primary beneficiary.
Recent Mergers
On July 1, 2020, ChoiceOne completed the merger of Community Shores Bank Corporation ("Community Shores") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2020 and December 31, 2021 include the impact of the merger.
On October 1, 2019, ChoiceOne completed the merger of County Bank Corp. ("County") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2019, December 31, 2020, and December 31, 2021 include the impact of the merger.
Nature of Operations
The Bank is a full-service community bank that offers commercial, consumer, and real estate loans as well as traditional demand, savings and time deposits to both commercial and consumer clients within the Bank’s primary market areas in Kent, Muskegon, Newaygo, and Ottawa counties in western Michigan and Lapeer, Macomb, and St. Clair counties in southeastern Michigan. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and real estate. Commercial loans are expected to be repaid from the cash flows from operations of businesses. Real estate loans are collateralized by either residential or commercial real estate.
The Insurance Agency is a wholly-owned subsidiary of the Bank. The Insurance Agency sells insurance policies such as life and health for both commercial and consumer clients. The Insurance Agency also offers alternative investment products such as annuities and mutual funds through a registered broker.
Together, the Bank and ChoiceOne's other direct and indirect subsidiaries account for substantially all of ChoiceOne’s assets, revenues and operating income.
Use of Estimates
To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, ChoiceOne’s management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. These estimates and assumptions are subject to many risks and uncertainties, Actual results may differ from these estimates. Estimates associated with the allowance for loan losses are particularly susceptible to change.
Cash and Cash Equivalents
Cash and cash equivalents are defined to include cash on hand, demand deposits with other banks, and federal funds sold. Cash flows are reported on a net basis for customer loan and deposit transactions, deposits with other financial institutions, and short-term borrowings with original terms of 90 days or less.
Securities
Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale because they might be sold before maturity. Debt securities classified as available for sale are carried at fair value, with unrealized holding gains and losses reported separately in the accumulated other comprehensive income or loss section of shareholders’ equity, net of tax effect. Restricted investments in Federal Reserve Bank stock and Federal Home Loan Bank stock are carried at cost. Equity securities consist of investments in preferred stock and investments in common stock of other financial institutions. Equity securities are reported at their fair value with changes in market value reported through current earnings.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized using the level-yield method without anticipating prepayments. Gains or losses on sales are recorded on the trade date based on the amortized cost of the security sold.
Management evaluates debt securities for other-than-temporary impairment ("OTTI") on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The evaluation of securities includes consideration of the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions and whether ChoiceOne has the intent to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. In analyzing an issuer's financial condition, management may consider whether the securities are issued by the federal government or its agencies, or U.S. Government sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether ChoiceOne intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If ChoiceOne intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings equal to the entire difference between the investment's amortized cost basis and its fair value at the balance sheet date. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. If a security is determined to be other-than-temporarily impaired, but ChoiceOne does not intend to sell the security, only the credit portion of the estimated loss is recognized in earnings, with the other portion of the loss recognized in other comprehensive income.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, remaining purchase accounting adjustments, and an allowance for loan losses. Loans held for sale are reported at the lower of cost or market, on an aggregate basis.
Interest income on loans is reported on the interest method and includes amortization of net deferred loan fees and costs over the estimated loan term. Interest on loans is accrued based upon the principal balance outstanding. The accrual of interest is discontinued at the time at which loans are 90 days past due unless the loan is secured by sufficient collateral and is in the process of collection. Past due status is based on the contractual terms of the loan. Loans are placed into nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. Interest accrued but not received is reversed against interest income when the loans are placed into nonaccrual status. Interest received on such loans is applied to principal until qualifying for return to accrual. Loans are returned to accrual basis when all the principal and interest amounts contractually due are brought current and future payment is reasonably assured.
No allowance for loan loss is recorded for loans acquired in a business combination unless losses are incurred subsequent to the acquisition date.
Acquired loans are considered purchased credit impaired (“PCI”) if as of the acquisition date, management determines the loan has evidence of deterioration in credit quality since origination and it is probable at acquisition the Company will be unable to collect all contractually required payments. The discount related to credit quality for PCI loans is recorded as an adjustment to the loan balance as of the acquisition date and is not accreted into income. Management subsequently estimates expected cash flows on an individual loan basis. If the present value of expected cash flows is less than a loan's carrying amount, an allowance for loan loss is recorded through the provision for loan losses. If the present value of expected cash flows is greater than the carrying amount, the excess may be reclassified to an accretable difference and recognized into income over the loan's remaining life.
For non-PCI loans, the difference between acquisition date fair value and expected cash flows is accreted into income over a pool's expected life using the level yield method.
Loans to Other Financial Institutions
Loans to other financial institutions are made for the purpose of providing a warehouse line of credit to facilitate funding of residential mortgage loan originations at other financial institutions. The loans are short-term in nature and are designed to provide funding for the time period between the loan origination and its subsequent sale in the secondary market. Loans to other financial institutions earn a share of interest income, determined by the contract, from when the loan is funded to when the loan is sold on the secondary market. Loans to other financial institutions are excluded from Note 3. Loans to other financial institutions were suspended at the end of the third quarter 2022 to preserve liquidity for loan growth.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. The allowance for loan losses is increased by the provision for loan losses and decreased by loans charged off less any recoveries of charged off loans. Management estimates the allowance for loan losses balance required based on past loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance for loan losses may be made for specific loans, but the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the allowance for loan losses when management believes that collection of a loan balance is not possible.
The allowance for loan losses consists of general and specific components. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component of management's estimate of the allowance for loan losses covers non-impaired loans and is based on historical loss experience adjusted for current factors. Management's adjustment for current factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, experience and ability of lending staff, national and economic trends and conditions, industry conditions, trends in real estate values, and other conditions.
A loan is impaired when full payment under the loan terms is not expected. Troubled debt restructuring of loans is undertaken to improve the likelihood that the loan will be repaid in full under the modified terms in accordance with a reasonable repayment schedule. All modified loans are evaluated to determine whether the loans should be reported as Troubled Debt Restructurings ("TDR"). A loan is a TDR when the Bank, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower by modifying a loan. To make this determination, the Bank must determine whether (a) the borrower is experiencing financial difficulties and (b) the Bank granted the borrower a concession. This determination requires consideration of all facts and circumstances surrounding the modification. An overall general decline in the economy or some deterioration in a borrower’s financial condition does not automatically mean the borrower is experiencing financial difficulties. Commercial loans are evaluated for impairment on an individual loan basis. If a loan is considered impaired or if a loan has been classified as a TDR, a portion of the allowance for loan losses is allocated to the loan so that it is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller-balance homogeneous loans such as consumer and residential real estate mortgage loans are collectively evaluated for impairment and, accordingly, they are not separately identified for impairment disclosures.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Land is carried at cost. Land improvements are depreciated using the straight-line method with useful lives ranging from 7 to 15 years. Building and related components are depreciated using the straight-line method with useful lives ranging from 5 to 39 years. Leasehold improvements are depreciated over the shorter of the estimated life or the lease term. Furniture and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 7 years. Fixed assets are periodically reviewed for impairment. If impaired, the assets are recorded at fair value.
Other Real Estate Owned
Real estate properties acquired in the collection of a loan are initially recorded at the lower of the Bank’s basis in the loans or fair value at acquisition establishing a new cost basis. Any reduction to fair value from the carrying value of the related loan is accounted for as a loan loss. After acquisition, a valuation allowance reduces the reported amount to the lower of the initial amount or fair value less costs to sell. Expenses to repair or maintain properties are included within other noninterest expenses. Gains and losses upon disposition and changes in the valuation allowance are reported net within noninterest income.
Bank Owned Life Insurance
Bank owned life insurance policies are stated at the current cash surrender value of the policy, or the policy death proceeds less any obligation to provide a death benefit to an insured’s beneficiaries if that value is less than the cash surrender value. Increases in the asset value are recorded as earnings in other income.
Loan Servicing Rights
Loan servicing rights represent the allocated value of servicing rights on loans sold with servicing retained. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Servicing rights are initially recorded at estimated fair value and fair value is determined using prices for similar assets with similar characteristics when available or based upon discounted cash flows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance.
Goodwill and Intangible Assets
Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of the acquired tangible assets and liabilities and identifiable intangible assets. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed.
Core Deposit Intangible
Core deposit intangible represents the value of the acquired customer core deposit bases and is included as an asset on the consolidated balance sheets. The core deposit intangible has an estimated finite life, is amortized on an accelerated basis over a 120 month period and is subject to periodic impairment evaluation.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet financing needs of customers. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Employee Benefit Plans
ChoiceOne’s 401(k) plan allows participants to make contributions to their individual accounts under the plan in amounts up to the IRS maximum. Employer matching contributions from ChoiceOne to its 401(k) plan are discretionary.
Income Taxes
Income tax expense is the sum of the current year income tax due and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
Earnings Per Share
Basic earnings per common share ("EPS") is based on weighted-average common shares outstanding. Diluted EPS assumes issuance of any dilutive potential common shares issuable under stock options or restricted stock units granted.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income or loss. Other comprehensive income or loss includes unrealized gains and losses on securities available for sale and changes in the funded status of derivative instruments, net of tax, which are also recognized as a separate component of shareholders’ equity.
Accumulated other comprehensive income was as follows:
(Dollars in thousands) | | As of December 31, | |
| | 2022 | | | 2021 | |
Unrealized gain (loss) on available-for-sale securities | | $ | (89,041 | ) | | $ | (3,261 | ) |
Unrealized gain (loss) on held to maturity securities | | | (3,053 | ) | | | — | |
Unrealized gain (loss) on derivative instruments | | | 1,212 | | | | | |
Tax effect | | | 19,085 | | | | 685 | |
Accumulated other comprehensive income (loss) | | $ | (71,797 | ) | | $ | (2,576 | ) |
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe that there are any such matters that may have a material effect on the financial statements as of December 31, 2022.
Cash Restrictions
Cash on hand or on deposit with the Federal Reserve Bank was
$0 at both
December 31, 2022 and
2021, as the Federal Reserve revoked the reserve requirement due to the COVID-
19 pandemic.
Leases are classified as operating or finance leases at the lease commencement date. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term. Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
Stock-Based Compensation
The Company values share-based stock option awards granted using the Black-Scholes option-pricing model. The Company recognizes compensation expense for its awards on a straight-line basis over the requisite service period for the entire award (straight-line attribution method), ensuring that the amount of compensation cost recognized at any date at least equals the portion of the grant-date fair value of the award that is vested at that time. Compensation costs related to stock options granted are disclosed in Note 15.
ChoiceOne has granted restricted stock units to a select group of employees under the Stock Incentive Plan of 2012. Each unit, once vested, is settled by delivery of one share of ChoiceOne common stock.
Dividend Restrictions
Banking regulations require the maintenance of certain capital levels and may limit the amount of dividends that may be paid by the Bank to ChoiceOne (see Note 21).
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, which are more fully documented in Note 18 to the consolidated financial statements. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Derivatives
At the inception of a derivative contract, ChoiceOne designates the derivative as one of two types based on our intention and belief as to the likely effectiveness of the hedge. These two types are (1) a hedge of changes in fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), and (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge"). For a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same period during which the hedged transaction affects the earnings. The changes in fair value of derivatives that do not qualify for hedge accounting are reported in current earnings, as noninterest income.
Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Cash flows on hedges are classified in the cash flow statement in the same line item as the cash flows of the item being hedged.
The initial fair value of hedge components excluded from the assessment of effectiveness are recognized in the statement of financial condition under a systematic and rational method over the life of the hedging relationship and are presented in the same income statement line item as the earnings effect of the hedged item. Any difference between the change in the fair value of the hedge components excluded from the assessment of effectiveness and the amounts recognized in earnings are recorded as a component of other comprehensive income.
ChoiceOne discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in fair values or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or the treatment of the derivative as a hedge is no longer appropriate or intended. When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods in which the hedged transactions will affect earnings.
ChoiceOne is exposed to losses if a counterparty fails to make its payments under a contract in which the Company is in the net receiving position. ChoiceOne anticipates that the counterparties will be able to fully satisfy their obligation under the agreements. All the contracts to which we are a party have cash flows that settle monthly or semiannually.
Operating Segments
While ChoiceOne’s management monitors the revenue streams of various products and services for the Bank and the Insurance Agency, operations and financial performance are evaluated on a company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated into one reportable operating segment.
Recent Accounting Pronouncements
The FASB issued ASU
No.
2016-
13
, Financial Instruments —
Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
This ASU provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current generally accepted accounting principles ("GAAP") with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance attempts to reflect an entity’s current estimate of all expected credit losses and broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is
no specified method for measuring expected credit losses, and an entity
may apply methods that reasonably reflect its expectations of the credit loss estimate. Although an entity
may still use its current systems and methods for recording the allowance for loan losses, under the new rules, the inputs used to record the allowance for loan losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. Additionally, credit losses on available-for-sale debt securities will have to be presented as an allowance rather than as a write-down. This ASU is effective for fiscal years beginning after
December 15, 2022, and for interim periods within those years for companies considered smaller reporting filers with the Securities and Exchange Commission. ChoiceOne adopted ASU
2016-
13 current expected credit loss ("CECL") on
January 1, 2023. Due to the current economic environment, the nature of the new calculation, and purchase accounting with our recent mergers, we anticipate an increase in our current allowance for loan losses of between
$6.5 million and
$7.0 million, which will result in an expected allowance for loan losses to total loan coverage ratio between
1.15% and
1.25% on
January 1, 2023. Approximately
20% to
25% of this increase is related to the migration of purchased loans into the portfolio assessed by the CECL calculation. ChoiceOne will also record a liability for expected credit losses on unfunded loans and other commitments of between
$2.5 million to
$3.0 million related to the adoption of CECL. These unfunded loans and other commitments are open credit lines with current customers and loans approved by ChoiceOne but
not yet funded. The increase in the reserve and the cost of the liability will result in a decrease in retained earnings account on our Consolidated Balance Sheet equal to the after-tax impact, with the tax impact portion being recorded in deferred taxes in our Consolidated balance Sheet in accordance with FASB guidance.
ChoiceOne has elected the discounted cash flow methodology for all loan types, and will be utilizing
third party software to store and measure historical loss experience. ChoiceOne has worked with a
third party advisory group to develop loss drivers which we believe have a strong correlation to our historical loss trends. The loss drivers ChoiceOne has elected are unemployment and GDP growth which have readily available
12 month forecast data from the FOMC.
Reclassifications
Certain amounts presented in prior year consolidated financial statements have been reclassified to conform to the 2022 presentation.
Note 2 – Securities
On January 1, 2022, ChoiceOne reassessed and transferred, at fair value, $428.4 million of securities classified as available for sale to the held to maturity classification. The net unrealized after-tax loss of $2.7 million as of the transfer date remained in accumulated other comprehensive income to be amortized over the remaining life of the securities, offsetting the related amortization of discount or premium on the transferred securities. No gains or losses were recognized at the time of the transfer. The remaining net unamortized unrealized loss on transferred securities included in accumulated other comprehensive income was $2.4 million after tax as of December 31, 2022.
The fair value of equity securities and the related gross unrealized gains and losses recognized in noninterest income at December 31 were as follows:
| | December 31, 2022 | |
| | | | | | Gross | | | Gross | | | | | |
(Dollars in thousands) | | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
| | Cost | | | Gains | | | Losses | | | Value | |
Equity securities | | $ | 8,982 | | | $ | 305 | | | $ | (721 | ) | | $ | 8,566 | |
| | December 31, 2021 | |
| | | | | | Gross | | | Gross | | | | | |
(Dollars in thousands) | | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
| | Cost | | | Gains | | | Losses | | | Value | |
Equity securities | | $ | 7,953 | | | $ | 665 | | | $ | (126 | ) | | $ | 8,492 | |
The fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:
| | December 31, 2022 | |
| | | | | | Gross | | | Gross | | | | | |
(Dollars in thousands) | | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
Available for Sale: | | Cost | | | Gains | | | Losses | | | Value | |
U.S. Government and federal agency | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
U.S. Treasury notes and bonds | | | 90,810 | | | | - | | | | (12,606 | ) | | | 78,204 | |
State and municipal | | | 277,489 | | | | - | | | | (47,551 | ) | | | 229,938 | |
Mortgage-backed | | | 236,703 | | | | - | | | | (28,140 | ) | | | 208,563 | |
Corporate | | | 757 | | | | - | | | | (46 | ) | | | 711 | |
Asset-backed securities | | | 13,031 | | | | - | | | | (698 | ) | | | 12,333 | |
Total | | $ | 618,790 | | | $ | - | | | $ | (89,041 | ) | | $ | 529,749 | |
| | December 31, 2021 | |
| | | | | | Gross | | | Gross | | | | | |
(Dollars in thousands) | | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
Available for Sale: | | Cost | | | Gains | | | Losses | | | Value | |
U.S. Government and federal agency | | $ | 2,001 | | | $ | 7 | | | $ | - | | | $ | 2,008 | |
U.S. Treasury notes and bonds | | | 93,267 | | | | 23 | | | | (1,311 | ) | | | 91,979 | |
State and municipal | | | 528,252 | | | | 10,704 | | | | (4,109 | ) | | | 534,847 | |
Mortgage-backed | | | 441,383 | | | | 781 | | | | (9,049 | ) | | | 433,115 | |
Corporate | | | 20,856 | | | | 19 | | | | (233 | ) | | | 20,642 | |
Asset-backed securities | | | 16,387 | | | | - | | | | (93 | ) | | | 16,294 | |
Total | | $ | 1,102,146 | | | $ | 11,534 | | | $ | (14,795 | ) | | $ | 1,098,885 | |
The fair value of securities held to maturity and the related gross unrealized gains and losses were as follows:
| | December 31, 2022 | |
| | | | | | Gross | | | Gross | | | | | |
(Dollars in thousands) | | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
Held to Maturity: | | Cost | | | Gains | | | Losses | | | Value | |
U.S. Government and federal agency | | $ | 2,966 | | | $ | - | | | $ | (421 | ) | | $ | 2,545 | |
State and municipal | | | 201,890 | | | | 1 | | | | (39,355 | ) | | | 162,536 | |
Mortgage-backed | | | 200,473 | | | | - | | | | (29,868 | ) | | | 170,605 | |
Corporate | | | 19,603 | | | | - | | | | (2,285 | ) | | | 17,318 | |
Asset-backed securities | | | 974 | | | | - | | | | (77 | ) | | | 897 | |
Total | | $ | 425,906 | | | $ | 1 | | | $ | (72,006 | ) | | $ | 353,901 | |
There were no securities held to maturity at December 31, 2021.
Information regarding sales of securities available for sale for the year ended December 31 follows:
(Dollars in thousands) | | | | | | | | | | | | |
| | 2022 | | | 2021 | | | 2020 | |
Proceeds from sales of securities | | $ | 47,167 | | | $ | 29,742 | | | $ | 121,942 | |
Gross realized gains | | | - | | | | - | | | | 1,308 | |
Gross realized losses | | | (809 | ) | | | (40 | ) | | | - | |
Contractual maturities of securities available for sale at December 31, 2022 were as follows:
(Dollars in thousands) | | Amortized | | | Fair | |
| | Cost | | | Value | |
Due within one year | | $ | 6,035 | | | $ | 5,972 | |
Due after one year through five years | | | 17,069 | | | | 16,176 | |
Due after five years through ten years | | | 149,578 | | | | 130,215 | |
Due after ten years | | | 209,405 | | | | 168,823 | |
Total debt securities | | | 382,087 | | | | 321,186 | |
Mortgage-backed securities | | | 236,703 | | | | 208,563 | |
Total | | $ | 618,790 | | | $ | 529,749 | |
Contractual maturities of securities held to maturity at December 31, 2022 were as follows:
(Dollars in thousands) | | Amortized | | | Fair | |
| | Cost | | | Value | |
Due within one year | | $ | 2,417 | | | $ | 2,389 | |
Due after one year through five years | | | 6,262 | | | | 5,834 | |
Due after five years through ten years | | | 109,263 | | | | 92,553 | |
Due after ten years | | | 107,491 | | | | 82,520 | |
Total debt securities | | | 225,433 | | | | 183,296 | |
Mortgage-backed securities | | | 200,473 | | | | 170,605 | |
Total | | $ | 425,906 | | | $ | 353,901 | |
Certain securities were pledged as collateral for participation in a program that provided Community Reinvestment Act credits. The carrying amount of the securities pledged as collateral at December 31 was as follows:
(Dollars in thousands) | | 2022 | | | 2021 | |
Securities pledged for Community Reinvestment Act credits | | $ | 250 | | | $ | 273 | |
Securities with unrealized losses at year-end 2022 and 2021, aggregated by investment category and length of time the individual securities have been in an unrealized loss position, were as follows:
| | 2022 | |
| | Less than 12 months | | | More than 12 months | | | Total | |
(Dollars in thousands) | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | |
Available for Sale: | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | |
U.S. Government and federal agency | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
U.S. Treasury notes and bonds | | | - | | | | - | | | | 78,204 | | | | 12,606 | | | | 78,204 | | | | 12,606 | |
State and municipal | | | 89,158 | | | | 12,612 | | | | 140,390 | | | | 34,939 | | | | 229,548 | | | | 47,551 | |
Mortgage-backed | | | 63,249 | | | | 3,093 | | | | 144,318 | | | | 25,047 | | | | 207,567 | | | | 28,140 | |
Corporate | | | 711 | | | | 46 | | | | - | | | | - | | | | 711 | | | | 46 | |
Asset-backed securities | | | - | | | | - | | | | 12,333 | | | | 698 | | | | 12,333 | | | | 698 | |
Total temporarily impaired | | $ | 153,118 | | | $ | 15,751 | | | $ | 375,245 | | | $ | 73,290 | | | $ | 528,363 | | | $ | 89,041 | |
| | 2021 | |
| | Less than 12 months | | | More than 12 months | | | Total | |
(Dollars in thousands) | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | |
Available for Sale: | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | |
U.S. Government and federal agency | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
U.S. Treasury notes and bonds | | | 89,958 | | | | 1,311 | | | | - | | | | - | | | | 89,958 | | | | 1,311 | |
State and municipal | | | 130,001 | | | | 3,253 | | | | 15,237 | | | | 856 | | | | 145,238 | | | | 4,109 | |
Mortgage-backed | | | 261,560 | | | | 5,709 | | | | 86,974 | | | | 3,340 | | | | 348,534 | | | | 9,049 | |
Corporate | | | 17,369 | | | | 233 | | | | - | | | | - | | | | 17,369 | | | | 233 | |
Asset-backed securities | | | 16,294 | | | | 93 | | | | - | | | | - | | | | 16,294 | | | | 93 | |
Total temporarily impaired | | $ | 515,182 | | | $ | 10,599 | | | $ | 102,211 | | | $ | 4,196 | | | $ | 617,393 | | | $ | 14,795 | |
| | 2022 | |
| | Less than 12 months | | | More than 12 months | | | Total | |
(Dollars in thousands) | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | |
Held to Maturity: | | Value | | | Losses | | | Value | | | Losses | | | Value | | | Losses | |
U.S. Government and federal agency | | $ | - | | | $ | - | | | $ | 2,545 | | | $ | 421 | | | $ | 2,545 | | | $ | 421 | |
State and municipal | | | 13,457 | | | | 1,899 | | | | 149,016 | | | | 37,456 | | | | 162,473 | | | | 39,355 | |
Mortgage-backed | | | 25,582 | | | | 822 | | | | 145,024 | | | | 29,046 | | | | 170,606 | | | | 29,868 | |
Corporate | | | 5,296 | | | | 603 | | | | 10,771 | | | | 1,682 | | | | 16,067 | | | | 2,285 | |
Asset-backed securities | | | - | | | | - | | | | 897 | | | | 77 | | | | 897 | | | | 77 | |
Total temporarily impaired | | $ | 44,335 | | | $ | 3,324 | | | $ | 308,253 | | | $ | 68,682 | | | $ | 352,588 | | | $ | 72,006 | |
There were no securities classified as held to maturity as of December 31, 2021.
ChoiceOne evaluates all securities on a quarterly basis to determine whether unrealized losses are temporary or other than temporary. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of ChoiceOne to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value of amortized cost basis. Management believed that unrealized losses as of December 31, 2022 were temporary in nature and were caused primarily by changes in interest rates, increased credit spreads, and reduced market liquidity and were not caused by the credit status of the issuer. No other than temporary impairments were recorded in 2022 or 2021.
Following is information regarding unrealized gains and losses on equity securities for the years ending December 31:
| | 2022 | | | 2021 | | | 2020 | |
| | | | | | | | | | | | |
Net gains and losses recognized during the period | | $ | (955 | ) | | $ | 479 | | | $ | (155 | ) |
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 | | $ | (955 | ) | | $ | 479 | | | $ | (155 | ) |
At December 31, 2022, there were 611 securities with an unrealized loss, compared to 247 securities with an unrealized loss as of December 31, 2021. Unrealized losses on corporate and municipal bonds have not been recognized into income because the issuers’ bonds are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.
The majority of unrealized losses at December 31, 2022, are related to U.S. Treasury notes and bonds, State and municipal bonds and mortgage backed. U.S. Treasury notes are guaranteed by the U.S. government and of which 100% are rated AA or better. State and municipal bonds are backed by the taxing authority of the bond issuer or the revenues from the bond. On December 31, 2022, 86% of state and municipal bonds held are rated AA or better. Agency issued securities are generally guaranteed by a U.S. government agency, such as the government national mortgage association which give 100% of these AA ratings or better. Of the mortgage-backed securities held on December 31, 2022, 38% were issued by US government sponsored entities and agencies, and rated AA, 31% are AAA rated private issue, and 13% are unrated privately issued mortgage-backed securities with structured credit enhancement.
Note 3 – Loans and Allowance for Loan Losses
The Bank’s loan portfolio as of December 31 was as follows:
(Dollars in thousands) | | | | | | | | |
| | 2022 | | | 2021 | |
Agricultural | | $ | 64,159 | | | $ | 64,819 | |
Commercial and industrial | | | 210,210 | | | | 203,024 | |
Consumer | | | 39,808 | | | | 35,174 | |
Real estate - commercial | | | 630,953 | | | | 525,884 | |
Real estate - construction | | | 14,736 | | | | 19,066 | |
Real estate - residential | | | 229,916 | | | | 168,881 | |
Loans, gross | | $ | 1,189,782 | | | $ | 1,016,848 | |
Allowance for Loan Losses | | | (7,619 | ) | | | (7,688 | ) |
Loans, net | | $ | 1,182,163 | | | $ | 1,009,160 | |
ChoiceOne manages its credit risk through the use of its loan policy and its loan approval process and by monitoring of loan credit performance. The loan approval process for commercial loans involves individual and group approval authorities. Individual authority levels are based on the experience of the lender. Group authority approval levels can consist of an internal loan committee that includes the Bank’s President or Senior Lender and other loan officers for loans that exceed individual approval levels, or a loan committee of the Board of Directors for larger commercial loans. Most consumer loans are approved by individual loan officers based on standardized underwriting criteria, with larger consumer loans subject to approval by the internal loan committee.
Ongoing credit review of commercial loans is the responsibility of the loan officers. ChoiceOne’s internal credit committee meets at least monthly and reviews loans with payment issues and loans with a risk rating of 6, 7, or 8. Risk ratings of commercial loans are reviewed periodically and adjusted if needed. ChoiceOne’s consumer loan portfolio is primarily monitored on an exception basis. Loans where payments are past due are turned over to the applicable Bank’s collection department, which works with the borrower to bring payments current or take other actions when necessary. In addition to internal reviews of credit performance, ChoiceOne contracts with a third party for independent loan review that monitors the loan approval process and the credit quality of the loan portfolio.
The table below details the outstanding balances of the County Bank Corp. acquired portfolio and the acquisition fair value adjustments at acquisition date:
(Dollars in thousands) | | Acquired | | | Acquired | | | Acquired | |
| | Impaired | | | Non-impaired | | | Total | |
Loans acquired - contractual payments | | $ | 7,729 | | | $ | 387,394 | | | $ | 395,123 | |
Nonaccretable difference | | | (2,928 | ) | | | - | | | | (2,928 | ) |
Expected cash flows | | | 4,801 | | | | 387,394 | | | | 392,195 | |
Accretable yield | | | (185 | ) | | | (1,894 | ) | | | (2,079 | ) |
Carrying balance at acquisition date | | $ | 4,616 | | | $ | 385,500 | | | $ | 390,116 | |
The table below presents a roll-forward of the accretable yield on County Bank Corp. acquired loans for the year ended December 31, 2022:
(Dollars in thousands) | | Acquired | | | Acquired | | | Acquired | |
| | Impaired | | | Non-impaired | | | Total | |
Balance, January 1, 2019 | | $ | - | | | $ | - | | | $ | - | |
Merger with County Bank Corp. on October 1, 2019 | | | 185 | | | | 1,894 | | | | 2,079 | |
Accretion October 1, 2019 through December 31, 2019 | | | - | | | | (75 | ) | | | -75 | |
Balance January 1, 2020 | | | 185 | | | | 1,819 | | | | 2,004 | |
Accretion January 1, 2020 through December 31, 2020 | | | (50 | ) | | | (295 | ) | | | (345 | ) |
Balance January 1, 2021 | | | 135 | | | | 1,524 | | | | 1,659 | |
Accretion January 1, 2021 through December 31, 2021 | | | (247 | ) | | | (348 | ) | | | (595 | ) |
Transfer from non-accretable to accretable yield | | | 400 | | | | - | | | | 400 | |
Balance January 1, 2022 | | | 288 | | | | 1,176 | | | | 1,464 | |
Transfer from non-accretable to accretable yield | | | 2,192 | | | | - | | | | 2,192 | |
Accretion January 1, 2022 through December 31, 2022 | | | (553 | ) | | | (98 | ) | | | (651 | ) |
Balance, December 31, 2022 | | $ | 1,927 | | | $ | 1,078 | | | $ | 3,005 | |
The table below details the outstanding balances of the Community Shores Bank Corporation acquired loan portfolio and the acquisition fair value adjustments at acquisition date:
(Dollars in thousands) | | Acquired | | | Acquired | | | Acquired | |
| | Impaired | | | Non-impaired | | | Total | |
Loans acquired - contractual payments | | $ | 20,491 | | | $ | 158,495 | | | $ | 178,986 | |
Nonaccretable difference | | | (2,719 | ) | | | - | | | | (2,719 | ) |
Expected cash flows | | | 17,772 | | | | 158,495 | | | | 176,267 | |
Accretable yield | | | (869 | ) | | | (596 | ) | | | (1,465 | ) |
Carrying balance at acquisition date | | $ | 16,903 | | | $ | 157,899 | | | $ | 174,802 | |
The table below presents a roll-forward of the accretable yield on Community Shores Bank Corporation acquired loans for the year ended December 31, 2022:
(Dollars in thousands) | | Acquired | | | Acquired | | | Acquired | |
| | Impaired | | | Non-impaired | | | Total | |
Balance January 1, 2020 | | $ | - | | | $ | - | | | $ | - | |
Merger with Community Shores Bank Corporation on July 1, 2020 | | | 869 | | | | 596 | | | | 1,465 | |
Accretion July 1, 2020 through December 31, 2020 | | | (26 | ) | | | (141 | ) | | | (167 | ) |
Balance, January 1, 2021 | | | 843 | | | | 455 | | | | 1,298 | |
Accretion January 1, 2021 through December 31, 2021 | | | (321 | ) | | | (258 | ) | | | (579 | ) |
Balance January 1, 2022 | | | 522 | | | | 197 | | | | 719 | |
Transfer from non-accretable to accretable yield | | | 1,086 | | | | - | | | | 1,086 | |
Accretion January 1, 2022 through December 31, 2022 | | | (993 | ) | | | (197 | ) | | | (1,190 | ) |
Balance, December 31, 2022 | | $ | 615 | | | $ | - | | | $ | 615 | |
Activity in the allowance for loan losses and balances in the loan portfolio was 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 Year Ended December 31, 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning balance | | $ | 448 | | | $ | 1,454 | | | $ | 290 | | | $ | 3,705 | | | $ | 110 | | | $ | 671 | | | $ | 1,010 | | | $ | 7,688 | |
Charge-offs | | | — | | | | (177 | ) | | | (496 | ) | | | — | | | | — | | | | — | | | | — | | | | (673 | ) |
Recoveries | | | — | | | | 143 | | | | 206 | | | | 3 | | | | — | | | | 2 | | | | — | | | | 354 | |
Provision | | | (304 | ) | | | (59 | ) | | | 310 | | | | 1,114 | | | | (47 | ) | | | 233 | | | | (997 | ) | | | 250 | |
Ending balance | | $ | 144 | | | $ | 1,361 | | | $ | 310 | | | $ | 4,822 | | | $ | 63 | | | $ | 906 | | | $ | 13 | | | $ | 7,619 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 2 | | | $ | 14 | | | $ | 1 | | | $ | 5 | | | $ | — | | | $ | 131 | | | $ | — | | | $ | 153 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Collectively evaluated for impairment | | $ | 142 | | | $ | 1,347 | | | $ | 309 | | | $ | 4,817 | | | $ | 63 | | | $ | 775 | | | $ | 13 | | | $ | 7,466 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 23 | | | $ | 177 | | | $ | 7 | | | $ | 165 | | | $ | — | | | $ | 2,474 | | | | | | | $ | 2,846 | |
Collectively evaluated for impairment | | | 64,136 | | | | 206,074 | | | | 39,793 | | | | 622,131 | | | | 14,736 | | | | 225,792 | | | | | | | | 1,172,662 | |
Acquired with deteriorated credit quality | | | — | | | | 3,959 | | | | 8 | | | | 8,657 | | | | — | | | | 1,650 | | | | | | | | 14,274 | |
Ending balance | | $ | 64,159 | | | $ | 210,210 | | | $ | 39,808 | | | $ | 630,953 | | | $ | 14,736 | | | $ | 229,916 | | | | | | | $ | 1,189,782 | |
| | | | | | Commercial | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | | | and | | | | | | | Commercial | | | Construction | | | Residential | | | | | | | | | |
| | Agricultural | | | Industrial | | | Consumer | | | Real Estate | | | Real Estate | | | Real Estate | | | Unallocated | | | Total | |
Allowance for Loan Losses Year Ended December 31, 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning balance | | $ | 257 | | | $ | 1,327 | | | $ | 317 | | | $ | 4,178 | | | $ | 97 | | | $ | 1,300 | | | $ | 117 | | | $ | 7,593 | |
Charge-offs | | | — | | | | (195 | ) | | | (370 | ) | | | (111 | ) | | | — | | | | — | | | | — | | | | (676 | ) |
Recoveries | | | — | | | | 86 | | | | 214 | | | | 48 | | | | — | | | | 7 | | | | — | | | | 355 | |
Provision | | | 191 | | | | 236 | | | | 129 | | | | (410 | ) | | | 13 | | | | (636 | ) | | | 893 | | | | 416 | |
Ending balance | | $ | 448 | | | $ | 1,454 | | | $ | 290 | | | $ | 3,705 | | | $ | 110 | | | $ | 671 | | | $ | 1,010 | | | $ | 7,688 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 251 | | | $ | 95 | | | $ | 2 | | | $ | 9 | | | $ | — | | | $ | 146 | | | $ | — | | | $ | 503 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Collectively evaluated for impairment | | $ | 197 | | | $ | 1,359 | | | $ | 288 | | | $ | 3,696 | | | $ | 110 | | | $ | 525 | | | $ | 1,010 | | | $ | 7,185 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 2,616 | | | $ | 339 | | | $ | 14 | | | $ | 273 | | | $ | — | | | $ | 2,191 | | | | | | | $ | 5,433 | |
Collectively evaluated for impairment | | | 62,203 | | | | 197,656 | | | | 35,148 | | | | 515,528 | | | | 19,066 | | | | 164,647 | | | | | | | | 994,248 | |
Acquired with deteriorated credit quality | | | — | | | | 5,029 | | | | 12 | | | | 10,083 | | | | — | | | | 2,043 | | | | | | | | 17,167 | |
Ending balance | | $ | 64,819 | | | $ | 203,024 | | | $ | 35,174 | | | $ | 525,884 | | | $ | 19,066 | | | $ | 168,881 | | | | | | | $ | 1,016,848 | |
| | | | | | Commercial | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | | | and | | | | | | | Commercial | | | Construction | | | Residential | | | | | | | | | |
| | Agricultural | | | Industrial | | | Consumer | | | Real Estate | | | Real Estate | | | Real Estate | | | Unallocated | | | Total | |
Allowance for Loan Losses Year Ended December 31, 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning balance | | $ | 471 | | | $ | 655 | | | $ | 270 | | | $ | 1,663 | | | $ | 76 | | | $ | 640 | | | $ | 282 | | | $ | 4,057 | |
Charge-offs | | | (15 | ) | | | (148 | ) | | | (329 | ) | | | (254 | ) | | | - | | | | (8 | ) | | | - | | | | (754 | ) |
Recoveries | | | - | | | | 57 | | | | 204 | | | | 10 | | | | - | | | | 19 | | | | - | | | | 290 | |
Provision | | | (199 | ) | | | 763 | | | | 172 | | | | 2,759 | | | | 21 | | | | 649 | | | | (165 | ) | | | 4,000 | |
Ending balance | | $ | 257 | | | $ | 1,327 | | | $ | 317 | | | $ | 4,178 | | | $ | 97 | | | $ | 1,300 | | | $ | 117 | | | $ | 7,593 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | - | | | $ | 19 | | | $ | 1 | | | $ | 157 | | | $ | - | | | $ | 254 | | | $ | - | | | $ | 431 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Collectively evaluated for impairment | | $ | 257 | | | $ | 1,308 | | | $ | 316 | | | $ | 4,021 | | | $ | 97 | | | $ | 1,046 | | | $ | 117 | | | $ | 7,162 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 348 | | | $ | 1,663 | | | $ | 8 | | | $ | 3,032 | | | $ | 80 | | | $ | 2,720 | | | | | | | $ | 7,851 | |
Collectively evaluated for impairment | | | 53,387 | | | | 295,154 | | | | 33,982 | | | | 453,681 | | | | 16,559 | | | | 186,982 | | | | | | | | 1,039,745 | |
Acquired with deteriorated credit quality | | | - | | | | 6,710 | | | | 24 | | | | 12,534 | | | | - | | | | 2,804 | | | | | | | | 22,072 | |
Ending balance | | $ | 53,735 | | | $ | 303,527 | | | $ | 34,014 | | | $ | 469,247 | | | $ | 16,639 | | | $ | 192,506 | | | | | | | $ | 1,069,668 | |
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 the Bank’s credit exposure as of December 31 was as follows:
Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category
(Dollars in thousands) | | Agricultural | | | Commercial and Industrial | | | Commercial Real Estate | |
| | December 31, | | | December 31, | | | December 31, | | | December 31, | | | December 31, | | | December 31, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
Pass | | $ | 63,867 | | | $ | 61,864 | | | $ | 209,700 | | | $ | 201,202 | | | $ | 624,555 | | | $ | 519,537 | |
Special Mention | | | 289 | | | | 339 | | | | 400 | | | | 300 | | | | 2,048 | | | | 778 | |
Substandard | | | 3 | | | | 2,616 | | | | 110 | | | | 1,266 | | | | 4,350 | | | | 5,569 | |
Doubtful | | | - | | | | - | | | | - | | | | 256 | | | | - | | | | - | |
Loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | $ | 64,159 | | | $ | 64,819 | | | $ | 210,210 | | | $ | 203,024 | | | $ | 630,953 | | | $ | 525,884 | |
Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity
(Dollars in thousands) | | Consumer | | | Construction Real Estate | | | Residential Real Estate | |
| | December 31, | | | December 31, | | | December 31, | | | December 31, | | | December 31, | | | December 31, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
Performing | | $ | 39,808 | | | $ | 35,174 | | | $ | 14,736 | | | $ | 19,066 | | | $ | 228,653 | | | $ | 168,031 | |
Nonperforming | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Nonaccrual | | | - | | | | - | | | | - | | | | - | | | | 1,263 | | | | 850 | |
| | $ | 39,808 | | | $ | 35,174 | | | $ | 14,736 | | | $ | 19,066 | | | $ | 229,916 | | | $ | 168,881 | |
Included within the loan categories above were loans in the process of foreclosure. As of December 31, 2022 and 2021, loans in the process of foreclosure totaled $1.1 million and $813,000, respectively.
Loans are classified as performing when they are current as to principal and interest payments or are past due on payments less than 90 days. Loans are classified as nonperforming when they are past due 90 days or more as to principal and interest payments or are considered a troubled debt restructuring.
The following schedule provides information on loans that were considered troubled debt restructurings ("TDRs") that were modified during the years ended December 31, 2022 and 2021:
| | Year Ended December 31, 2022 | | | Year Ended December 31, 2021 | | | Year Ended December 31, 2020 | |
| | | | | | Pre- | | | Post- | | | | | | | Pre- | | | Post- | | | | | | | Pre- | | | Post- | |
| | | | | | Modification | | | Modification | | | | | | | Modification | | | Modification | | | | | | | Modification | | | Modification | |
| | | | | | Outstanding | | | Outstanding | | | | | | | Outstanding | | | Outstanding | | | | | | | Outstanding | | | Outstanding | |
(Dollars in thousands) | | Number of | | | Recorded | | | Recorded | | | Number of | | | Recorded | | | Recorded | | | Number of | | | Recorded | | | Recorded | |
| | Loans | | | Investment | | | Investment | | | Loans | | | Investment | | | Investment | | | Loans | | | Investment | | | Investment | |
Agricultural | | | - | | | $ | - | | | $ | - | | | | 5 | | | $ | 1,803 | | | $ | 1,803 | | | | 5 | | | $ | 1,803 | | | $ | 1,803 | |
Commercial and Industrial | | | 1 | | | | 15 | | | | 15 | | | | 4 | | | | 270 | | | | 270 | | | | 4 | | | | 270 | | | | 270 | |
Commercial Real Estate | | | - | | | | - | | | | - | | | | 2 | | | | 619 | | | | 619 | | | | 2 | | | | 619 | | | | 619 | |
Total | | | 1 | | | $ | 15 | | | $ | 15 | | | | 11 | | | $ | 2,692 | | | $ | 2,692 | | | | 11 | | | $ | 2,692 | | | $ | 2,692 | |
There were no TDRs as of December 31, 2022 where the borrower was past due with respect to principal and interest for 30 days or more during the year ended December 31, 2022. The following schedule provides information on TDRs as of December 31, 2021 where the borrower was past due with respect to principal and/or interest for 30 days or more during the year ended December 31, 2021 that had been modified during the year prior to the default:
| | Year Ended | | | Year Ended | | | Year Ended | |
| | December 31, 2022 | | | December 31, 2021 | | | December 31, 2020 | |
(Dollars in thousands) | | Number | | | Recorded | | | Number | | | Recorded | | | Number | | | Recorded | |
| | of Loans | | | Investment | | | of Loans | | | Investment | | | of Loans | | | Investment | |
Commercial Real Estate | | | - | | | | - | | | | 1 | | | | 185 | | | | - | | | | - | |
Total | | | - | | | $ | - | | | | 1 | | | $ | 185 | | | | - | | | $ | - | |
Impaired loans by loan category as of December 31 were as follows:
| | | | | | Unpaid | | | | | | | Average | | | Interest | |
(Dollars in thousands) | | Recorded | | | Principal | | | Related | | | Recorded | | | Income | |
| | Investment | | | Balance | | | Allowance | | | Investment | | | Recognized | |
December 31, 2022 | | | | | | | | | | | | | | | | | | | | |
With no related allowance recorded | | | | | | | | | | | | | | | | | | | | |
Agricultural | | $ | - | | | $ | - | | | $ | - | | | $ | 250 | | | $ | - | |
Commercial and industrial | | | - | | | | - | | | | - | | | | 18 | | | | - | |
Consumer | | | - | | | | - | | | | - | | | | - | | | | - | |
Construction real estate | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial real estate | | | - | | | | - | | | | - | | | | 19 | | | | - | |
Residential real estate | | | 550 | | | | 595 | | | | - | | | | 231 | | | | 1 | |
Subtotal | | | 550 | | | | 595 | | | | - | | | | 518 | | | | 1 | |
With an allowance recorded | | | | | | | | | | | | | | | | | | | | |
Agricultural | | | 23 | | | | 27 | | | | 2 | | | | 913 | | | | 2 | |
Commercial and industrial | | | 177 | | | | 177 | | | | 14 | | | | 209 | | | | 13 | |
Consumer | | | 7 | | | | 7 | | | | 1 | | | | 14 | | | | 1 | |
Construction real estate | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial real estate | | | 165 | | | | 165 | | | | 5 | | | | 158 | | | | 13 | |
Residential real estate | | | 1,924 | | | | 1,954 | | | | 131 | | | | 1,897 | | | | 93 | |
Subtotal | | | 2,296 | | | | 2,330 | | | | 153 | | | | 3,191 | | | | 122 | |
Total | | | | | | | | | | | | | | | | | | | | |
Agricultural | | | 23 | | | | 27 | | | | 2 | | | | 1,163 | | | | 2 | |
Commercial and industrial | | | 177 | | | | 177 | | | | 14 | | | | 227 | | | | 13 | |
Consumer | | | 7 | | | | 7 | | | | 1 | | | | 14 | | | | 1 | |
Construction real estate | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial real estate | | | 165 | | | | 165 | | | | 5 | | | | 177 | | | | 13 | |
Residential real estate | | | 2,474 | | | | 2,549 | | | | 131 | | | | 2,128 | | | | 94 | |
Total | | $ | 2,846 | | | $ | 2,925 | | | $ | 153 | | | $ | 3,709 | | | $ | 123 | |
| | | | | | Unpaid | | | | | | | Average | | | Interest | |
(Dollars in thousands) | | Recorded | | | Principal | | | Related | | | Recorded | | | Income | |
| | Investment | | | Balance | | | Allowance | | | Investment | | | Recognized | |
December 31, 2021 | | | | | | | | | | | | | | | | | | | | |
With no related allowance recorded | | | | | | | | | | | | | | | | | | | | |
Agricultural | | $ | 314 | | | $ | 428 | | | $ | - | | | $ | 598 | | | $ | - | |
Commercial and industrial | | | - | | | | - | | | | - | | | | 596 | | | | - | |
Consumer | | | - | | | | - | | | | - | | | | - | | | | - | |
Construction real estate | | | - | | | | - | | | | - | | | | 16 | | | | - | |
Commercial real estate | | | 94 | | | | 94 | | | | - | | | | 1,117 | | | | 5 | |
Residential real estate | | | 164 | | | | 172 | | | | - | | | | 228 | | | | - | |
Subtotal | | | 572 | | | | 694 | | | | - | | | | 2,555 | | | | 5 | |
With an allowance recorded | | | | | | | | | | | | | | | | | | | | |
Agricultural | | | 2,302 | | | | 2,302 | | | | 251 | | | | 1,873 | | | | 139 | |
Commercial and industrial | | | 339 | | | | 363 | | | | 95 | | | | 226 | | | | 5 | |
Consumer | | | 14 | | | | 15 | | | | 2 | | | | 4 | | | | - | |
Construction real estate | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial real estate | | | 179 | | | | 179 | | | | 9 | | | | 456 | | | | 10 | |
Residential real estate | | | 2,027 | | | | 2,084 | | | | 146 | | | | 2,177 | | | | 64 | |
Subtotal | | | 4,861 | | | | 4,943 | | | | 503 | | | | 4,736 | | | | 218 | |
Total | | | | | | | | | | | | | | | | | | | | |
Agricultural | | | 2,616 | | | | 2,730 | | | | 251 | | | | 2,471 | | | | 139 | |
Commercial and industrial | | | 339 | | | | 363 | | | | 95 | | | | 822 | | | | 5 | |
Consumer | | | 14 | | | | 15 | | | | 2 | | | | 4 | | | | - | |
Construction real estate | | | - | | | | - | | | | - | | | | 16 | | | | - | |
Commercial real estate | | | 273 | | | | 273 | | | | 9 | | | | 1,573 | | | | 15 | |
Residential real estate | | | 2,191 | | | | 2,256 | | | | 146 | | | | 2,405 | | | | 64 | |
Total | | $ | 5,433 | | | $ | 5,637 | | | $ | 503 | | | $ | 7,291 | | | $ | 223 | |
| | | | | | Unpaid | | | | | | | Average | | | Interest | |
(Dollars in thousands) | | Recorded | | | Principal | | | Related | | | Recorded | | | Income | |
| | Investment | | | Balance | | | Allowance | | | Investment | | | Recognized | |
December 31, 2020 | | | | | | | | | | | | | | | | | | | | |
With no related allowance recorded | | | | | | | | | | | | | | | | | | | | |
Agricultural | | $ | 348 | | | $ | 434 | | | $ | - | | | $ | 329 | | | $ | - | |
Commercial and industrial | | | 1,516 | | | | 1,629 | | | | - | | | | 464 | | | | 2 | |
Consumer | | | - | | | | - | | | | - | | | | 1 | | | | - | |
Construction real estate | | | 80 | | | | 80 | | | | - | | | | 16 | | | | - | |
Commercial real estate | | | 1,852 | | | | 2,664 | | | | - | | | | 1,495 | | | | 14 | |
Residential real estate | | | 162 | | | | 162 | | | | - | | | | 99 | | | | 3 | |
Subtotal | | | 3,958 | | | | 4,969 | | | | - | | | | 2,404 | | | | 19 | |
With an allowance recorded | | | | | | | | | | | | | | | | | | | | |
Agricultural | | | - | | | | - | | | | - | | | | 152 | | | | - | |
Commercial and industrial | | | 147 | | | | 147 | | | | 19 | | | | 111 | | | | 12 | |
Consumer | | | 8 | | | | 8 | | | | 1 | | | | 16 | | | | - | |
Construction real estate | | | - | | | | - | | | | - | | | | - | | | | - | |
Commercial real estate | | | 1,180 | | | | 1,180 | | | | 157 | | | | 897 | | | | 35 | |
Residential real estate | | | 2,558 | | | | 2,651 | | | | 254 | | | | 2,330 | | | | 87 | |
Subtotal | | | 3,893 | | | | 3,986 | | | | 431 | | | | 3,506 | | | | 134 | |
Total | | | | | | | | | | | | | | | | | | | | |
Agricultural | | | 348 | | | | 434 | | | | - | | | | 481 | | | | - | |
Commercial and industrial | | | 1,663 | | | | 1,776 | | | | 19 | | | | 575 | | | | 14 | |
Consumer | | | 8 | | | | 8 | | | | 1 | | | | 17 | | | | - | |
Construction real estate | | | 80 | | | | 80 | | | | - | | | | 16 | | | | - | |
Commercial real estate | | | 3,032 | | | | 3,844 | | | | 157 | | | | 2,392 | | | | 49 | |
Residential real estate | | | 2,720 | | | | 2,813 | | | | 254 | | | | 2,429 | | | | 90 | |
Total | | $ | 7,851 | | | $ | 8,955 | | | $ | 431 | | | $ | 5,910 | | | $ | 153 | |
An aging analysis of loans by loan category as of December 31 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 | |
December 31, 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Agricultural | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 64,159 | | | $ | 64,159 | | | $ | - | |
Commercial and industrial | | | - | | | | 171 | | | | - | | | | 171 | | | | 210,039 | | | | 210,210 | | | | - | |
Consumer | | | 39 | | | | 7 | | | | - | | | | 46 | | | | 39,762 | | | | 39,808 | | | | - | |
Commercial real estate | | | - | | | | - | | | | - | | | | - | | | | 630,953 | | | | 630,953 | | | | - | |
Construction real estate | | | - | | | | - | | | | - | | | | - | | | | 14,736 | | | | 14,736 | | | | - | |
Residential real estate | | | 682 | | | | - | | | | 842 | | | | 1,524 | | | | 228,392 | | | | 229,916 | | | | - | |
| | $ | 721 | | | $ | 178 | | | $ | 842 | | | $ | 1,741 | | | $ | 1,188,041 | | | $ | 1,189,782 | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Agricultural | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 64,819 | | | $ | 64,819 | | | $ | - | |
Commercial and industrial | | | 21 | | | | - | | | | 88 | | | | 109 | | | | 202,915 | | | | 203,024 | | | | - | |
Consumer | | | 70 | | | | 15 | | | | - | | | | 85 | | | | 35,089 | | | | 35,174 | | | | - | |
Commercial real estate | | | 422 | | | | 13 | | | | 279 | | | | 714 | | | | 525,170 | | | | 525,884 | | | | - | |
Construction real estate | | | 1,149 | | | | 1,235 | | | | - | | | | 2,384 | | | | 16,682 | | | | 19,066 | | | | - | |
Residential real estate | | | 1,489 | | | | 306 | | | | 454 | | | | 2,249 | | | | 166,632 | | | | 168,881 | | | | - | |
| | $ | 3,151 | | | $ | 1,569 | | | $ | 821 | | | $ | 5,541 | | | $ | 1,011,307 | | | $ | 1,016,848 | | | $ | - | |
(1) Includes nonaccrual loans
Nonaccrual loans by loan category as of December 31 as follows:
(Dollars in thousands) | | | | | | |
| | 2022 | | | 2021 | |
Agricultural | | $ | - | | | $ | 313 | |
Commercial and industrial | | | - | | | | 285 | |
Consumer | | | - | | | | - | |
Commercial real estate | | | - | | | | 279 | |
Construction real estate | | | - | | | | - | |
Residential real estate | | | 1,263 | | | | 850 | |
| | $ | 1,263 | | | $ | 1,727 | |
Note 4 – Mortgage Banking
Activity in secondary market loans during the year was as follows:
(Dollars in thousands) | | | | | | | | | | | | |
| | 2022 | | | 2021 | | | 2020 | |
Loans originated for resale, net of principal payments | | $ | 71,829 | | | $ | 197,387 | | | $ | 326,286 | |
Proceeds from loan sales | | | 77,681 | | | | 205,398 | | | | 325,306 | |
Net gains on sales of loans held for sale | | | 2,343 | | | | 6,776 | | | | 11,313 | |
Loan servicing fees, net of amortization | | | 175 | | | | (163 | ) | | | (129 | ) |
Net gains on sales of loans held for sale include capitalization of loan servicing rights. Loans serviced for others are not reported as assets in the accompanying consolidated balance sheets. The unpaid principal balances of these loans were $488.6 million and $481.9 million at December 31, 2022 and 2021, respectively. The Bank maintains custodial escrow balances in connection with these serviced loans; however, such escrows were immaterial at December 31, 2022 and 2021.
Activity for loan servicing rights (included in other assets) was as follows:
(Dollars in thousands) | | | | | | | | | | | | |
| | 2022 | | | 2021 | | | 2020 | |
Balance, beginning of year | | $ | 4,667 | | | $ | 3,967 | | | $ | 2,131 | |
Capitalized | | | 1,007 | | | | 1,961 | | | | 3,554 | |
Amortization | | | (1,352 | ) | | | (1,635 | ) | | | (1,344 | ) |
Market valuation allowance change | | | - | | | | 374 | | | | (374 | ) |
Balance, end of year | | $ | 4,322 | | | $ | 4,667 | | | $ | 3,967 | |
The fair value of loan servicing rights was $5,855,000 and $5,521,000 as of December 31, 2022 and 2021, respectively. Valuation allowances of $0 were recorded at December 31, 2022 and December 31, 2021, respectively. The fair value of the Bank’s servicing rights at December 31, 2022 was determined using a discount rate of 8.00% and prepayment speeds ranging from 5.2% to 6.7%. The fair value of the Bank’s servicing rights at December 31, 2021 was determined using a discount rate of 8.00% and prepayment speeds ranging from 5% to 27%.
Note 5 – Premises and Equipment
As of December 31, premises and equipment consisted of the following:
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
Land and land improvements |
|
$ |
8,327 |
|
|
$ |
8,888 |
|
Leasehold improvements |
|
|
81 |
|
|
|
69 |
|
Buildings |
|
|
26,823 |
|
|
|
26,091 |
|
Furniture and equipment |
|
|
11,208 |
|
|
|
11,145 |
|
Total cost |
|
|
46,439 |
|
|
|
46,193 |
|
Accumulated depreciation |
|
|
(18,207 |
) |
|
|
(16,313 |
) |
Premises and equipment, net |
|
$ |
28,232 |
|
|
$ |
29,880 |
|
Depreciation expense was $2.7 million, and $2.6 million in 2022 and 2021, respectively.
The Bank leases certain branch properties and automated-teller machine locations in its normal course of business. Rent expense totaled $211,000, and $153,000 for 2022 and 2021, respectively. The associated right of use assets are included in the applicable categories of fixed assets in the above table and the net book value of such assets approximates the operating lease liability. Rent commitments under non-cancelable operating leases were as follows, before considering renewal options that generally are present (dollars in thousands):
2023 |
|
$ |
322 |
|
2024 |
|
|
232 |
|
2025 |
|
|
227 |
|
2026 |
|
|
166 |
|
2027 |
|
|
65 |
|
Total undiscounted cash flows |
|
|
1,012 |
|
Less discount |
|
|
119 |
|
Total operating lease liabilities |
|
$ |
893 |
|
Note 6 - Goodwill and Acquired Intangible Assets
Goodwill
The change in the balance for goodwill was as follows:
(Dollars in thousands) | | 2022 | | | 2021 | |
Balance, beginning of year | | $ | 59,946 | | | $ | 60,506 | |
Goodwill adjustment from merger with Community Shores Bank Corporation | | | - | | | | (560 | ) |
Balance, end of year | | $ | 59,946 | | | $ | 59,946 | |
Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit's fair value. Accounting pronouncements allow a company to first perform a qualitative assessment for goodwill prior to a quantitative assessment (Step 1 assessment). If the results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative assessment must be performed. If not, there is no further assessment required. The Company acquired Valley Ridge Financial Corp. in 2006, County in 2019, and Community Shores in 2020, which resulted in the recognition of goodwill of $13.7 million, $38.9 million and $7.3 million, respectively.
We conducted an annual assessment of goodwill as of June 30, 2022 and no impairment was identified. The Company used a qualitative assessment to determine goodwill was not impaired as of June 30, 2022.
Additionally, the Company engaged a third party valuation firm to assist in performing a quantitative analysis of goodwill as of November 30, 2022 ("the valuation date"). In deriving the fair value of the reporting unit (the Bank), the third-party firm assessed general economic conditions and outlook; industry and market considerations and outlook; the impact of recent events to financial performance; the market price of ChoiceOne’s common stock and other relevant events. In addition, the valuation relied on financial projections through 2027 and growth rates prepared by management. Based on the valuation prepared, it was determined that ChoiceOne's estimated fair value of the reporting unit at the valuation date was greater than its book value and impairment of goodwill was not required.
Management concurred with the conclusion derived from the quantitative goodwill analysis as of the valuation date and determined that there were
no material changes and that
no triggering events had occurred that indicated impairment from the valuation date through
December 31, 2022, and as a result that it is more likely than
not that there was
no goodwill impairment as of
December 31, 2022.
Acquired Intangible Assets
Information for acquired intangible assets at December 31 is as follows:
| | 2022 | | | 2021 | |
| | Gross | | | | | | | Gross | | | | | |
| | Carrying | | | Accumulated | | | Carrying | | | Accumulated | |
(Dollars in thousands) | | Amount | | | Amortization | | | Amount | | | Amortization | |
Core deposit intangible | | $ | 7,120 | | | $ | 4,311 | | | $ | 7,120 | | | $ | 3,158 | |
The core deposit intangible from the County and Community Shores mergers is being amortized on a sum-of-the-years digits basis over ten years and eight years, respectively. Amortization expense was $1,153,000 in 2022 and $1,307,000 in 2021. The estimated amortization expense for the next five years ending December 31 is as follows (dollars in thousands):
2023 | | $ | 955 | |
2024 | | | 757 | |
2025 | | | 560 | |
2026 | | | 362 | |
2027 | | | 164 | |
Thereafter | | | 11 | |
Total | | $ | 2,809 | |
Note 7 – Other Real Estate Owned
Other real estate owned represents residential and commercial properties primarily owned as a result of loan collection activities and is reported net of a valuation allowance. Activity within other real estate owned was as follows:
(Dollars in thousands) |
|
2022 |
|
|
2021 |
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
194 |
|
|
$ |
266 |
|
|
$ |
929 |
|
Transfers from loans |
|
|
- |
|
|
|
520 |
|
|
|
391 |
|
Additions from merger |
|
|
- |
|
|
|
- |
|
|
|
346 |
|
Proceeds from sales |
|
|
(235 |
) |
|
|
(611 |
) |
|
|
(1,384 |
) |
Write-downs |
|
|
- |
|
|
|
- |
|
|
|
(80 |
) |
Gains on sales |
|
|
41 |
|
|
|
19 |
|
|
|
64 |
|
Balance, end of year |
|
$ |
- |
|
|
$ |
194 |
|
|
$ |
266 |
|
Included in the balances above were residential real estate mortgage loans of $0, $80,000, and $61,000 as of December 31, 2022, 2021, and 2020, respectively, and $0, $114,000, and $205,000 of commercial real estate loans as of December 31, 2022, 2021, and 2020 respectively.
Note 8 – Derivatives and Hedging Activities
ChoiceOne is exposed to certain risks relating to its ongoing business operations. ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying term (such as a rate, security price or price index) as specified in the contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying term. Derivatives are also implicit in certain contracts and commitments.
ChoiceOne recognizes derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. ChoiceOne records derivative assets and derivative liabilities on the balance sheet within other assets and other liabilities, respectively. Changes in the fair value of derivative financial instruments are either recognized in income or in shareholders’ equity as a component of accumulated other comprehensive income or loss depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value hedge or cash flow hedge.
ChoiceOne currently uses interest rate swaps and interest rate caps to manage its exposure to certain fixed and variable rate assets and variable rate liabilities.
Interest rate swaps
ChoiceOne uses interest rate swaps as part of its interest rate risk management strategy to add stability to net interest income and to manage its exposure to interest rate movements. Interest rate swaps designated as hedges involve the receipt of variable-rate amounts from a counterparty in exchange for ChoiceOne making fixed-rate payments or the receipt of fixed-rate amounts from a counterparty in exchange for ChoiceOne making variable rate payments, over the life of the agreements without the exchange of the underlying notional amount.
In the second quarter of 2022, ChoiceOne entered into two pay-floating/receive-fixed interest rate swaps (the “Pay Floating Swap Agreements”) for a total notional amount of $200.0 million that were designated as cash flow hedges. These derivatives hedge the variable cash flows of specifically identified available-for-sale securities, cash and loans. The Pay Floating Swap Agreements were determined to be highly effective during the periods presented and therefore no amount of ineffectiveness has been included in net income. The Pay Floating Swap Agreements will pay a coupon rate equal to SOFR while receiving a fixed coupon rate of 2.41%.
Net cash settlements received for the twelve months ended December 31, 2022, on pay-floating/ received-fixed swaps were $161,000 as of December 31, 2022, which were included in interest income.
In the second quarter of 2022, ChoiceOne entered into one forward starting pay-fixed/receive-floating interest rate swap (the “Pay Fixed Swap Agreement”) for a notional amount of $200.0 million that was designated as a cash flow hedge. This derivative hedges the risk of variability in cash flows attributable to forecasted payments on future deposits or floating rate borrowings indexed to the SOFR Rate. The Pay Fixed Swap Agreement is two years forward starting with an eight-year term set to expire in 2032. The Pay Fixed Swap Agreements will pay a fixed coupon rate of 2.75% while receiving the SOFR Rate.
In the fourth quarter of 2022, ChoiceOne entered into four pay-fixed/receive-floating interest rate swaps for a total notional amount of $201.0 million that were designated as fair value hedges. These derivatives hedge the risk of changes in fair value of certain available for sale securities for changes in the SOFR benchmark interest rate component of the fixed rate bonds. All four of these hedges were effective immediately on December 22, 2022. Of the total notional value, $101.9 million has a ten-year term set to expire in 2032, with the benchmark SOFR interest rate risk component of the fixed rate bonds equal to 3.390%. Of the total notional value, $50.0 million has a nine-year term set to expire in 2031, with the benchmark SOFR interest rate risk component of the fixed rate bonds equal to 3.4015%. The remaining notional value of $49.1 million has a nine-year term set to expire in 2031, with the benchmark SOFR interest rate risk component of the fixed rate bonds equal to 3.4030%. ChoiceOne adopted ASC2022-01, as of December 20, 2022, to use the portfolio layer method. The fair value basis adjustment associated with an available-for-sale fixed rate bonds initially results in an adjustment to AOCI. For available-for-sale securities subject to fair value hedge accounting, the changes in the fair value of the fixed rate bonds related to the hedged risk (the benchmark interest rate component and the partial term) are then reclassed from AOCI to current earnings offsetting the fair value measurement change of the interest rate swap, which is also recorded in current earnings. Net cash settlements are received/paid semi-annually, with the first starting in March 2023, and will be included in interest income.
Subsequent to December 31, 2022, ChoiceOne terminated all pay-floating/receive-fixed (“pay floating swap agreements”) interest rate swaps with a notational amount of $200.0 million which resulted in a loss of $4.2 million. The pay floating swap agreements were designated as cash flow hedges against specifically identified available-for-sale securities, cash and loans. The loss was capitalized to available for sale securities and loans on the statement of financial condition and will be amortized into interest income over 13 months, or the remaining period of the agreements. Refer to footnote 23 for further discussion.
Interest rate caps
ChoiceOne also uses interest rate caps to provide stability to net interest income and to manage its exposure to interest rate movements. Interest rate caps designated as hedges involve the payment of a fixed premium by ChoiceOne who will then receive payments equivalent to the spread between the current rate and the strike rate until the conclusion of the term from the counterparty.
In the second quarter of 2022, ChoiceOne entered into four forward starting interest rate cap agreements with a total notional amount of $200.0 million (“SOFR Cap Agreements”). Three of the SOFR Cap Agreements with a total notional amount of $100.0 million are designated as fair value hedges and hedge against changes in the fair value of certain fixed rate tax-exempt municipal bonds. ChoiceOne utilizes the interest rate caps as hedges against adverse changes in interest rates on the designated securities attributable to fluctuations in the SOFR rate above 2.68%, as applicable. An increase in the benchmark interest rate hedged reduces the fair value of these assets. The remaining SOFR Cap Agreement with a notional amount of $100.0 million is designated as a cash flow hedge and hedges against the risk of variability in cash flows attributable to fluctuations in the SOFR rate above 2.68% for forecasted payments on future deposits or borrowings indexed to the SOFR Rate. All of the SOFR Cap Agreements are two-year forward starting with an eight-year term set to expire in 2032. The initial amount excluded from hedge effectiveness testing and amortized into earnings over the life of the interest rate cap derivatives is $16.5 million.
In the fourth quarter of 2022, ChoiceOne sold all four of the SOFR Cap Agreements for a total of $15,550,000, which resulted in a loss of $770,803. Of the total loss, $321,903 was related to the SOFR Cap Agreements designated as a cash flow hedge and recognized immediately in interest expense. The remaining loss of $448,900 was related to the SOFR Cap Agreements designated as fair value hedges and was capitalized to available for sale securities on the statement of financial condition and will be amortized into interest income over the weighted average life of the available for sale securities hedged.
The table below presents the fair value of derivative financial instruments as well as the classification within the consolidated statements of financial condition.
| December 31, 2022 | | December 31, 2021 | |
(Dollars in thousands) | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | |
Derivatives designated as hedging instruments | | | | | | | | | | |
Interest rate contracts | Other Assets | | $ | 9,204 | | Other Assets | | $ | - | |
Interest rate contracts | Other Liabilities | | $ | 5,823 | | Other Liabilities | | $ | - | |
The table below presents the cumulative basis adjustments on hedged items designated as fair value hedges and the related amortized cost of those items as of the periods presented.
| | Location and Amount of Gain or (Loss) | | | Location and Amount of Gain or (Loss) | |
| | Recognized in Income on Fair Value and Cash Flow Hedging Relationships | | | Recognized in Income on Fair Value and Cash Flow Hedging Relationships | |
| | Year Ended December 31, 2022 | | | Year Ended December 31, 2021 | |
(Dollars in thousands) | | Interest Income | | | Interest Expense | | | Interest Income | | | Interest Expense | |
Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded | | $ | (55 | ) | | $ | (825 | ) | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | |
Gain or (loss) on fair value hedging relationships: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Hedged items | | $ | (1,930 | ) | | $ | - | | | $ | - | | | $ | - | |
Derivatives designated as hedging instruments | | $ | 2,171 | | | $ | - | | | $ | - | | | $ | - | |
Amount excluded from effectiveness testing recognized in earnings based on amortization approach | | $ | (496 | ) | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | |
Gain or (loss) on cash flow hedging relationships: | | | | | | | | | | | | | | | | |
Interest rate contracts: | | | | | | | | | | | | | | | | |
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Amount excluded from effectiveness testing recognized in earnings based on amortization approach | | $ | - | | | $ | (503 | ) | | $ | - | | | $ | - | |
The table below presents the effect of fair value and cash flow hedge accounting on the consolidated statements of operations for the periods presented.
| | | | | | 12/31/2022 | |
| | | | | | Cumulative amount of Fair | |
(Dollars in thousands) | | | | | | Value Hedging Adjustment | |
Line Item in the Statement of | | | | | | included in the carrying | |
Financial Position in which the | | Amortized cost of the | | | amount of the Hedged | |
Hedged Item is included | | Hedged Assets/(Liabilities) | | | Assets/(Liabilities) | |
| | | | | | | | |
Securities available for sale | | $ | 225,851 | | | $ | 1,930 | |
Note 9 – Deposits
Deposit balances as of December 31 consisted of the following:
(Dollars in thousands) |
|
2022 |
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits |
|
$ |
599,579 |
|
|
$ |
560,931 |
|
Interest-bearing demand deposits |
|
|
638,641 |
|
|
|
665,482 |
|
Money market deposits |
|
|
214,026 |
|
|
|
218,211 |
|
Savings deposits |
|
|
427,583 |
|
|
|
425,626 |
|
Local certificates of deposit |
|
|
236,431 |
|
|
|
182,044 |
|
Brokered certificates of deposit |
|
|
1,743 |
|
|
|
- |
|
Total deposits |
|
$ |
2,118,003 |
|
|
$ |
2,052,294 |
|
Scheduled maturities of certificates of deposit as of December 31, 2022 were as follows:
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
2023 |
|
$ |
210,989 |
|
2024 |
|
|
16,334 |
|
2025 |
|
|
5,778 |
|
2026 |
|
|
2,619 |
|
2027 |
|
|
2,452 |
|
Total |
|
$ |
238,174 |
|
The Bank had certificates of deposit issued in denominations of $250,000 or greater totaling $148.9 million and $87.3 million at December 31, 2022 and 2021, respectively. The Bank held $1.7 million and $0 in brokered certificates of deposit at December 31, 2022 and 2021, respectively. In addition, the Bank had $17.3 million and $13.7 million of certificates of deposit as of December 31, 2022, and December 31, 2021, respectively, that had been issued through the Certificate of Deposit Account Registry Service ("CDARS").
Note 10 – Borrowings
Federal Home Loan Bank Advances
At December 31, advances from the FHLB were as follows:
(Dollars in thousands) | | 2022 | | | 2021 | |
| | | | | | | | |
Maturity of January 2023 with fixed interest rate of 4.16% | | $ | 50,000 | | | $ | - | |
Maturity of January 2022 with fixed interest rate of .21% | | | - | | | | 50,000 | |
Total advances outstanding at year-end | | $ | 50,000 | | | $ | 50,000 | |
Fees are charged on fixed rate advances that are paid prior to maturity. Fees of $0 and $16,000 were charged in 2022 and 2021, respectively. Advances were secured by residential real estate loans with a carrying value of approximately $169.7 million and $127.5 million at December 31, 2022 and December 31, 2021, respectively. Based on this collateral, the Bank was eligible to borrow an additional $39.6 million at year-end 2022. FHLB Advances matured in January 2023.
In June 2021, ChoiceOne obtained a $20,000,000 line of credit with an annual renewal. The line carries a floating rate of prime rate with a floor of 3.25%. The credit agreement includes certain financial covenants, including minimum capital ratios, asset quality ratios, and the requirements of achieving certain profitability thresholds. ChoiceOne was in compliance with all covenants as of December 31, 2022. The line of credit balance was $0 at December 31, 2022.
Note 11 – Subordinated Debentures
The Capital Trust sold 4,500 Cumulative Preferred Securities (“trust preferred securities”) at $1,000 per security in a December 2004 offering. The proceeds from the sale of the trust preferred securities were used by the Capital Trust to purchase an equivalent amount of subordinated debentures from Community Shores. The trust preferred securities and subordinated debentures carry a floating rate of 2.05% over the 3-month LIBOR and the rate was 5.72% at December 31, 2022 and 2.27% at December 31, 2021. The stated maturity is December 30, 2034. The trust preferred securities are redeemable at par value on any interest payment date and are, in effect, guaranteed by ChoiceOne. Interest on the subordinated debentures is payable quarterly on March 30, June 30, September 30 and December 30. ChoiceOne is not considered the primary beneficiary of the Capital Trust (under the variable interest entity rules), therefore the Capital Trust is not consolidated in the consolidated financial statements, rather the subordinated debentures are shown as a liability, and the interest expense is recorded in the consolidated statement of income.
The terms of the subordinated debentures, the trust preferred securities and the agreements under which they were issued give ChoiceOne the right, from time to time, to defer payment of interest for up to 20 consecutive quarters, unless certain specified events of default have occurred and are continuing. The deferral of interest payments on the subordinated debentures results in the deferral of distributions on the trust preferred securities.
In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. The notes will initially bear interest at a fixed interest rate of 3.25% per annum until September 3, 2026, after which time the interest rate will reset quarterly to a floating rate equal to a benchmark rate, which is expected to be the then current three-month term Secured Overnight Financing Rate ("SOFR") plus 255 basis points until the notes’ maturity on September 3, 2031. The notes are redeemable by ChoiceOne, in whole or in part, on or after September 3, 2026, and at any time upon the occurrence of certain events. The notes have been structured to qualify as Tier 2 capital for ChoiceOne for regulatory capital purposes. ChoiceOne used a portion of net proceeds from the private placement to redeem senior debt, fund common stock repurchases, and support bank-level capital ratios.
Note 12 – Income Taxes
Information as of December 31 and for the year follows:
(Dollars in thousands) | | | | | | | | | | | | |
| | 2022 | | | 2021 | | | 2020 | |
Provision for Income Taxes | | | | | | | | | | | | |
Current federal income tax expense | | $ | 4,033 | | | $ | 3,532 | | | $ | 3,070 | |
Deferred federal income tax expense/(benefit) | | | (15 | ) | | | 924 | | | | 202 | |
Income tax expense | | $ | 4,018 | | | $ | 4,456 | | | $ | 3,272 | |
| | | | | | | | | | | | |
Reconciliation of Income Tax Provision to Statutory Rate | | | | | | | | | | | | |
Income tax computed at statutory federal rate of 21% | | $ | 5,808 | | | $ | 5,565 | | | $ | 3,966 | |
Tax exempt interest income | | | (1,323 | ) | | | (1,190 | ) | | | (574 | ) |
Tax exempt earnings on bank-owned life insurance | | | (276 | ) | | | (170 | ) | | | (162 | ) |
Tax credits | | | (289 | ) | | | (284 | ) | | | (240 | ) |
Nondeductible merger expenses | | | - | | | | - | | | | 182 | |
Disallowed interest expense | | | 179 | | | | 74 | | | | 64 | |
Other items | | | (81 | ) | | | 461 | | | | 36 | |
Income tax expense | | $ | 4,018 | | | $ | 4,456 | | | $ | 3,272 | |
| | | | | | | | | | | | |
Effective income tax rate | | | 15 | % | | | 17 | % | | | 17 | % |
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Deferred Tax Assets and Liabilities |
|
2022 |
|
|
2021 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Purchase accounting adjustments from mergers with County |
|
|
|
|
|
|
|
|
and Community Shores |
|
$ |
945 |
|
|
$ |
1,374 |
|
Allowance for loan losses |
|
|
1,600 |
|
|
|
1,614 |
|
Unrealized losses on securities available for sale |
|
|
19,745 |
|
|
|
685 |
|
Net operating loss carryforward |
|
|
505 |
|
|
|
544 |
|
Deferred loan fees and costs, net |
|
|
- |
|
|
|
319 |
|
Compensation |
|
|
299 |
|
|
|
286 |
|
Other |
|
|
716 |
|
|
|
68 |
|
Total deferred tax assets |
|
|
23,810 |
|
|
|
4,890 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Purchase accounting adjustments from mergers with County |
|
|
|
|
|
|
|
|
and Community Shores |
|
|
844 |
|
|
|
1,107 |
|
Loan servicing rights |
|
|
908 |
|
|
|
980 |
|
Depreciation |
|
|
605 |
|
|
|
540 |
|
Interest rate derivative contracts |
|
|
660 |
|
|
|
- |
|
Deferred loan fees and costs, net |
|
|
15 |
|
|
|
- |
|
Other |
|
|
404 |
|
|
|
323 |
|
Total deferred tax liabilities |
|
|
3,436 |
|
|
|
2,950 |
|
Net deferred tax asset (liability) |
|
$ |
20,374 |
|
|
$ |
1,940 |
|
As of December 31, 2022, deferred tax assets included federal net operating loss carryforwards of approximately $2.4 million which was acquired through the merger with Community Shores. The loss carryforwards expire at various dates from 2031 to 2035. Deferred tax assets are recognized for net operating losses because the benefit is more likely than not to be realized. Under Code Section 382, ChoiceOne is limited to applying approximately $185,000 of net operating losses per year.
Note 13 – Related Party Transactions
Loans to executive officers, directors and their affiliates were as follows at December 31:
(Dollars in thousands) |
|
2022 |
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
$ |
24,000 |
|
|
$ |
20,724 |
|
New loans |
|
|
9,684 |
|
|
|
13,188 |
|
Repayments |
|
|
(9,259 |
) |
|
|
(9,912 |
) |
Effect of changes in related parties |
|
|
(389 |
) |
|
|
- |
|
Balance, end of year |
|
$ |
24,036 |
|
|
$ |
24,000 |
|
Deposits from executive officers, directors and their affiliates were $30.0 million and $16.8 million at December 31, 2022 and 2021, respectively.
Note 14 – Employee Benefit Plans
401(k) Plan:
The 401(k) plan allows employees to contribute to their individual accounts under the plan amounts up to the IRS maximum. Matching company contributions to the plan are discretionary. Expense for matching company contributions under the plan was $650,000 and $627,000 in 2022 and 2021, respectively.
Note 15 - Stock Based Compensation
Options to buy stock have been granted to key employees to provide them with additional equity interests in ChoiceOne. Compensation expense in connection with stock options granted was $4,000 in 2022 and $15,000 in 2021. The Stock Incentive Plan of 2022 was approved by the Company’s shareholders at the Annual Meeting held on May 25, 2022. The Stock Incentive Plan of 2022 provides for the issuance of up to 200,000 shares of common stock. At December 31, 2022, there were 200,000 shares available for future grants.
A summary of stock options activity during the year ended December 31, 2022 was as follows:
| | | | | | Weighted | | | Weighted | |
| | | | | | average | | | average | |
| | | | | | exercise | | | Grant Date | |
| | Shares | | | price | | | Fair Value | |
| | | | | | | | | | | | |
Options outstanding at January 1, 2022 | | | 20,631 | | | $ | 25.30 | | | $ | 3.46 | |
Options granted | | | - | | | | - | | | | - | |
Options exercised | | | - | | | | - | | | | - | |
Options forfeited or expired | | | - | | | | - | | | | - | |
Options outstanding, end of year | | | 20,631 | | | $ | 25.30 | | | $ | 3.46 | |
| | | | | | | | | | | | |
Options exercisable at December 31, 2022 | | | 20,631 | | | $ | 25.30 | | | $ | 3.46 | |
The exercise prices for options outstanding and exercisable at the end of 2022 ranged from $20.86 to $27.25 per share. The weighted average remaining contractual life of options outstanding and exercisable at the end of 2022 was approximately 5.57 years.
The intrinsic value of all outstanding stock options and exercisable stock options was $76,000 and $34,000 respectively, at December 31, 2022 and December 31, 2021. The aggregate intrinsic values of outstanding and exercisable options at December 31, 2022 were calculated based on the closing market price of the Company’s common stock on December 31, 2022 of $29.00 per share less the exercise price.
Information pertaining to options outstanding at December 31, 2022 was as follows:
Exercise price of stock options: | | | Number of options outstanding at year-end | | | Number of options exercisable at year-end | | | Average remaining contractual life (in years) | |
$ | 27.25 | | | | 12,000 | | | | 12,000 | | | | 6.42 | |
$ | 25.65 | | | | 3,000 | | | | 3,000 | | | | 5.50 | |
$ | 20.86 | | | | 3,306 | | | | 3,306 | | | | 4.35 | |
$ | 21.13 | | | | 2,325 | | | | 2,325 | | | | 3.00 | |
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. ChoiceOne uses historical data to estimate the volatility of the market price of ChoiceOne stock and employee terminations within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. As of December 31, 2022, there was no unrecognized compensation expense related to stock options.
ChoiceOne has granted restricted stock units to a select group of employees under the Stock Incentive Plan of 2012. Restricted stock units outstanding as of December 31, 2022 vest on the three year anniversary of the grant date. Certain additional vesting provisions apply. Each restricted stock unit, once vested, is settled by delivery of one share of ChoiceOne common stock. ChoiceOne recognized compensation expense of $503,000 and $320,000, in 2022 and 2021, respectively, in connection with restricted stock units for current participants during these years.
A summary of the activity for restricted stock units outstanding during the year ended December 31, 2022 is presented below:
Outstanding Stock Awards | | Shares | | | Weighted Average Grant Date Fair Value Per Share | |
Outstanding at January 1, 2022 | | | 35,684 | | | $ | 28.36 | |
Granted | | | 28,660 | | | | 26.34 | |
Vested | | | (10,442 | ) | | | 27.34 | |
Forfeited | | | (35 | ) | | | 26.34 | |
Outstanding at December 31, 2022 | | | 53,867 | | | $ | 27.48 | |
At December 31, 2022, there were 53,867 restricted stock units outstanding with an approximate stock value of $1.6 million based on ChoiceOne’s December 31, 2022 stock price. At December 31, 2021, there were 35,684 restricted stock units outstanding with an approximate stock value of $945,000 based on ChoiceOne’s December 31, 2021 stock price. The grant date fair value of restricted stock units granted was $755,000 and $558,000 in 2022 and 2021, respectively. The cost is expected to be recognized over a weighted average period of 1.68 years. As of December 31, 2022, there was $753,000 of unrecognized compensation cost related to unvested shares granted.
ChoiceOne has granted performance stock units to a select group of employees under the Stock Incentive Plan of 2012. Restricted stock units outstanding as of December 31, 2022 vest on the three year anniversary of the grant date based on earnings per share growth rate from the date of the grant. Shares can vest at a rate of 125%, 100%, 75%, or 0% based on the growth rate achieved over the three year time frame. Certain additional vesting provisions apply. Each restricted stock unit, once vested, is settled by delivery of one share of ChoiceOne common stock. ChoiceOne recognized compensation expense of $47,000 in 2022 in connection with performance stock units for current participants during the year.
A summary of the activity for performance stock units outstanding during the year ended December 31, 2022 is presented below:
| | | | | | Weighted | |
| | | | | | Average Grant | |
| | | | | | Date Fair Value | |
Outstanding Stock Awards | | Shares | | | Per Share | |
Outstanding at January 1, 2022 | | | - | | | $ | - | |
Granted | | | 6,396 | | | | 26.34 | |
Vested | | | - | | | | - | |
Forfeited | | | - | | | | - | |
Outstanding at December 31, 2022 | | | 6,396 | | | $ | 26.34 | |
At December 31, 2022, there were 6,396 performance stock units outstanding assuming 100% vesting with an approximate stock value of $185,000 based on ChoiceOne’s December 31, 2022 stock price. The grant date fair value of restricted stock units granted was $168,000 in 2022. The cost is expected to be recognized over a weighted average period of 2.36 years. As of December 31, 2022, there was $122,000 of unrecognized compensation cost related to unvested shares granted.
Note 16 - Earnings Per Share
(Dollars in thousands, except share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
23,640 |
|
|
$ |
22,042 |
|
|
$ |
15,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
7,504,173 |
|
|
|
7,685,459 |
|
|
|
7,521,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common shares |
|
$ |
3.15 |
|
|
$ |
2.87 |
|
|
$ |
2.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
23,640 |
|
|
$ |
22,042 |
|
|
$ |
15,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
7,504,173 |
|
|
|
7,685,459 |
|
|
|
7,521,771 |
|
Plus dilutive stock options and restricted stock units |
|
|
23,198 |
|
|
|
17,255 |
|
|
|
9,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding and potentially dilutive shares |
|
|
7,527,371 |
|
|
|
7,702,714 |
|
|
|
7,531,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
3.15 |
|
|
$ |
2.86 |
|
|
$ |
2.07 |
|
Stock options considered anti-dilutive to earnings per share were 15,000, 15,000, and 0 as of December 31, 2022, December 31, 2021, and December 31, 2020, respectively. This calculation is based on the average stock price during the year.
Note 17 – Condensed Financial Statements of Parent Company
Condensed Balance Sheets
(Dollars in thousands) | | December 31, | |
| | 2022 | | | 2021 | |
Assets | | | | | | | | |
Cash | | $ | 8,310 | | | $ | 17,622 | |
Equity securities at fair value | | | 3,199 | | | | 2,555 | |
Other assets | | | 586 | | | | 553 | |
Investment in subsidiaries | | | 192,540 | | | | 236,462 | |
Total assets | | $ | 204,635 | | | $ | 257,192 | |
| | | | | | | | |
Liabilities | | | | | | | | |
Subordinated debentures | | $ | 31,971 | | | $ | 31,827 | |
Trust preferred securities | | | 3,291 | | | | 3,190 | |
Other liabilities | | | 499 | | | | 506 | |
Total liabilities | | | 35,761 | | | | 35,523 | |
| | | | | | | | |
Shareholders' equity | | | 168,874 | | | | 221,669 | |
Total liabilities and shareholders’ equity | | $ | 204,635 | | | $ | 257,192 | |
Condensed Statements of Income
(Dollars in thousands) | | Years Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Interest income | | | | | | | | | | | | |
Interest and dividends from ChoiceOne Bank | | $ | - | | | $ | 6,125 | | | $ | 12,942 | |
Interest and dividends from other securities | | | 27 | | | | 10 | | | | 13 | |
Total interest income | | | 27 | | | | 6,135 | | | | 12,955 | |
| | | | | | | | | | | | |
Interest expense | | | | | | | | | | | | |
Borrowings | | | 1,491 | | | | 645 | | | | 239 | |
| | | | | | | | | | | | |
Net interest income | | | (1,464 | ) | | | 5,490 | | | | 12,716 | |
| | | | | | | | | | | | |
Noninterest income | | | | | | | | | | | | |
Gains on sales of securities | | | - | | | | - | | | | 26 | |
Change in market value of equity securities | | | (385 | ) | | | 554 | | | | (155 | ) |
Other | | | 2 | | | | 4 | | | | - | |
Total noninterest income | | | (383 | ) | | | 558 | | | | (129 | ) |
| | | | | | | | | | | | |
Noninterest expense | | | | | | | | | | | | |
Salaries and benefits | | | - | | | | - | | | | 1,201 | |
Professional fees | | | 40 | | | | 15 | | | | 1,093 | |
Other | | | 174 | | | | 203 | | | | 217 | |
Total noninterest expense | | | 214 | | | | 218 | | | | 2,511 | |
| | | | | | | | | | | | |
Income before income tax and equity in undistributed net income of subsidiary | | | (2,061 | ) | | | 5,830 | | | | 10,076 | |
Income tax (expense)/benefit | | | 433 | | | | 64 | | | | 431 | |
Income before equity in undistributed net income of subsidiary | | | (1,628 | ) | | | 5,894 | | | | 10,507 | |
Equity in undistributed net income of subsidiary | | | 25,268 | | | | 16,148 | | | | 5,106 | |
Net income | | $ | 23,640 | | | $ | 22,042 | | | $ | 15,613 | |
Condensed Statements of Cash Flows
(Dollars in thousands) | | Years Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net income | | $ | 23,640 | | | $ | 22,042 | | | $ | 15,613 | |
Adjustments to reconcile net income to net cash from operating activities: | | | | | | | | | | | | |
Equity in undistributed net income of subsidiary | | | (25,268 | ) | | | (16,148 | ) | | | (5,106 | ) |
Amortization | | | 245 | | | | 101 | | | | 51 | |
Compensation expense on employee and director stock purchases, stock options, and restricted stock units | | | 928 | | | | 787 | | | | 488 | |
Net gain on sale of securities | | | - | | | | - | | | | (26 | ) |
Change in market value of equity securities | | | 385 | | | | (554 | ) | | | 155 | |
Changes in other assets | | | (33 | ) | | | (260 | ) | | | 582 | |
Changes in other liabilities | | | (7 | ) | | | (2,982 | ) | | | 551 | |
Net cash from operating activities | | | (110 | ) | | | 2,986 | | | | 12,308 | |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Sales of securities | | | - | | | | - | | | | 958 | |
Purchases of securities | | | (1,029 | ) | | | (117 | ) | | | (200 | ) |
Investment in Subsidiary | | | - | | | | (5,000 | ) | | | - | |
Cash acquired from mergers with Community Shores Bank Corporation | | | - | | | | - | | | | 142 | |
Net cash from investing activities | | | (1,029 | ) | | | (5,117 | ) | | | 900 | |
| | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Issuance of common stock | | | 172 | | | | 139 | | | | 134 | |
Repurchase of common stock | | | (767 | ) | | | (7,786 | ) | | | - | |
Proceeds from borrowings | | | - | | | | 36,827 | | | | 10,000 | |
Payments on borrowings | | | - | | | | (14,166 | ) | | | (833 | ) |
Cash used as part of equity issuance for merger | | | - | | | | - | | | | (5,387 | ) |
Cash dividends paid | | | (7,578 | ) | | | (7,200 | ) | | | (6,174 | ) |
Net cash from financing activities | | | (8,173 | ) | | | 7,814 | | | | (2,260 | ) |
| | | | | | | | | | | | |
Net change in cash | | | (9,312 | ) | | | 5,683 | | | | 10,948 | |
Beginning cash | | | 17,622 | | | | 11,939 | | | | 991 | |
Ending cash | | $ | 8,310 | | | $ | 17,622 | | | $ | 11,939 | |
Note 18 – 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) |
|
December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
43,943 |
|
|
$ |
43,943 |
|
|
$ |
43,943 |
|
|
$ |
- |
|
|
$ |
- |
|
Equity securities at fair value |
|
|
8,566 |
|
|
|
8,566 |
|
|
|
6,024 |
|
|
|
- |
|
|
|
2,542 |
|
Securities available for sale |
|
|
529,749 |
|
|
|
529,749 |
|
|
|
78,204 |
|
|
|
451,545 |
|
|
|
- |
|
Securities held to maturity |
|
|
425,906 |
|
|
|
353,901 |
|
|
|
- |
|
|
|
338,583 |
|
|
|
15,318 |
|
Federal Home Loan Bank and Federal Reserve Bank stock |
|
|
8,581 |
|
|
|
8,581 |
|
|
|
- |
|
|
|
8,581 |
|
|
|
- |
|
Loans held for sale |
|
|
4,834 |
|
|
|
4,979 |
|
|
|
- |
|
|
|
4,979 |
|
|
|
- |
|
Loans, net |
|
|
1,182,163 |
|
|
|
1,123,198 |
|
|
|
- |
|
|
|
- |
|
|
|
1,123,198 |
|
Accrued interest receivable |
|
|
8,949 |
|
|
|
8,949 |
|
|
|
- |
|
|
|
8,949 |
|
|
|
- |
|
Interest rate lock commitments |
|
|
28 |
|
|
|
28 |
|
|
|
- |
|
|
|
28 |
|
|
|
- |
|
Mortgage loan servicing rights |
|
|
4,322 |
|
|
|
5,855 |
|
|
|
- |
|
|
|
5,855 |
|
|
|
- |
|
Interest rate derivative contracts |
|
|
9,204 |
|
|
|
9,204 |
|
|
|
- |
|
|
|
9,204 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
|
599,579 |
|
|
|
599,579 |
|
|
|
- |
|
|
|
599,579 |
|
|
|
- |
|
Interest-bearing deposits |
|
|
1,518,424 |
|
|
|
1,514,294 |
|
|
|
- |
|
|
|
1,514,294 |
|
|
|
- |
|
Borrowings |
|
|
50,000 |
|
|
|
50,000 |
|
|
|
- |
|
|
|
50,000 |
|
|
|
- |
|
Subordinated debentures |
|
|
35,262 |
|
|
|
30,304 |
|
|
|
- |
|
|
|
30,304 |
|
|
|
- |
|
Accrued interest payable |
|
|
610 |
|
|
|
610 |
|
|
|
- |
|
|
|
610 |
|
|
|
- |
|
Interest rate derivative contracts |
|
|
5,823 |
|
|
|
5,823 |
|
|
|
- |
|
|
|
5,823 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
31,887 |
|
|
$ |
31,887 |
|
|
$ |
31,887 |
|
|
$ |
- |
|
|
$ |
- |
|
Equity securities at fair value |
|
|
8,492 |
|
|
|
8,492 |
|
|
|
6,724 |
|
|
|
- |
|
|
|
1,768 |
|
Securities available for sale |
|
|
1,098,885 |
|
|
|
1,098,885 |
|
|
|
91,979 |
|
|
|
985,856 |
|
|
|
21,050 |
|
Federal Home Loan Bank and Federal Reserve Bank stock |
|
|
8,888 |
|
|
|
8,888 |
|
|
|
- |
|
|
|
8,888 |
|
|
|
- |
|
Loans held for sale |
|
|
9,351 |
|
|
|
9,632 |
|
|
|
- |
|
|
|
9,632 |
|
|
|
- |
|
Loans to other financial institutions |
|
|
42,632 |
|
|
|
42,632 |
|
|
|
- |
|
|
|
42,632 |
|
|
|
- |
|
Loans, net |
|
|
1,009,160 |
|
|
|
999,393 |
|
|
|
- |
|
|
|
- |
|
|
|
999,393 |
|
Accrued interest receivable |
|
|
8,211 |
|
|
|
8,211 |
|
|
|
- |
|
|
|
8,211 |
|
|
|
- |
|
Interest rate lock commitments |
|
|
172 |
|
|
|
172 |
|
|
|
- |
|
|
|
172 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
|
560,931 |
|
|
|
560,931 |
|
|
|
- |
|
|
|
560,931 |
|
|
|
- |
|
Interest-bearing deposits |
|
|
1,491,363 |
|
|
|
1,491,135 |
|
|
|
- |
|
|
|
1,491,135 |
|
|
|
- |
|
Borrowings |
|
|
50,000 |
|
|
|
50,000 |
|
|
|
- |
|
|
|
50,000 |
|
|
|
- |
|
Subordinated debentures |
|
|
35,017 |
|
|
|
33,414 |
|
|
|
- |
|
|
|
33,414 |
|
|
|
- |
|
Accrued interest payable |
|
|
441 |
|
|
|
441 |
|
|
|
- |
|
|
|
441 |
|
|
|
- |
|
The estimated fair values approximate the carrying amounts for all financial instruments except those described later in this paragraph. The methodology for determining the estimated fair value for securities available for sale is described in Note 18. The estimated fair value for loans follows an “exit price” approach, which incorporates discounts for credit, liquidity, and marketability. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns. The estimated fair value of loans also included the mark to market adjustments related to the Company’s mergers.
The estimated fair value of deposits is based on comparing the average rate paid on deposits compared to the three month LIBOR rate which is assumed to be the replacement value of these deposits. The estimated fair values for time deposits and FHLB advances are based on the rates paid at December 31 for new deposits or FHLB advances, applied until maturity. The estimated fair values for other financial instruments and off-balance sheet loan commitments are considered nominal.
Note 19 – Fair Value Measurements
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2022 and December 31, 2021, and the valuation techniques used by the Company to determine those fair values.
In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.
In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.
Disclosures concerning assets and liabilities measured at fair value as of December 31, 2021 or December 31, 2022 are as follows:
Assets and Liabilities Measured at Fair Value on a Recurring Basis
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
(Dollars in thousands) |
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
Balance at |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Date Indicated |
|
Equity Securities Held at Fair Value - December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
6,024 |
|
|
$ |
- |
|
|
$ |
2,542 |
|
|
$ |
8,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities, Available for Sale - December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government and federal agency |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
U. S. Treasury notes and bonds |
|
|
78,204 |
|
|
|
- |
|
|
|
- |
|
|
|
78,204 |
|
State and municipal |
|
|
- |
|
|
|
229,938 |
|
|
|
- |
|
|
|
229,938 |
|
Mortgage-backed |
|
|
- |
|
|
|
208,563 |
|
|
|
- |
|
|
|
208,563 |
|
Corporate |
|
|
- |
|
|
|
711 |
|
|
|
- |
|
|
|
711 |
|
Asset-backed Securities |
|
|
- |
|
|
|
12,333 |
|
|
|
- |
|
|
|
12,333 |
|
Total |
|
$ |
78,204 |
|
|
$ |
451,545 |
|
|
$ |
- |
|
|
$ |
529,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments - December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivative contracts - assets |
|
$ |
- |
|
|
$ |
9,204 |
|
|
$ |
- |
|
|
$ |
9,204 |
|
Interest rate derivative contracts - liabilities |
|
$ |
- |
|
|
$ |
5,823 |
|
|
$ |
- |
|
|
$ |
5,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities Held at Fair Value - December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
6,724 |
|
|
$ |
- |
|
|
$ |
1,768 |
|
|
$ |
8,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities, Available for Sale - December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government and federal agency |
|
$ |
- |
|
|
$ |
2,008 |
|
|
$ |
- |
|
|
$ |
2,008 |
|
U. S. Treasury notes and bonds |
|
|
91,979 |
|
|
|
- |
|
|
|
- |
|
|
|
91,979 |
|
State and municipal |
|
|
- |
|
|
|
514,797 |
|
|
|
20,050 |
|
|
|
534,847 |
|
Mortgage-backed |
|
|
- |
|
|
|
433,115 |
|
|
|
- |
|
|
|
433,115 |
|
Corporate |
|
|
- |
|
|
|
19,642 |
|
|
|
1,000 |
|
|
|
20,642 |
|
Asset-backed Securities |
|
|
- |
|
|
|
16,294 |
|
|
|
- |
|
|
|
16,294 |
|
Total |
|
$ |
91,979 |
|
|
$ |
985,856 |
|
|
$ |
21,050 |
|
|
$ |
1,098,885 |
|
Securities classified as available for sale are generally reported at fair value utilizing Level 2 inputs. ChoiceOne’s external investment advisor obtained fair value measurements from an independent pricing service that uses matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). The fair value measurements considered observable data that may include dealer quotes, market spreads, cash flows and the bonds' terms and conditions, among other things. Securities classified in Level 2 included U.S. Government and federal agency securities, state and municipal securities, mortgage-backed securities, corporate bonds, and asset backed securities. The Company classified certain state and municipal securities and corporate bonds, and equity securities as Level 3. Based on the lack of observable market data, estimated fair values were based on the observable data available and reasonable unobservable market data.
Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
Equity Securities Held at Fair Value |
|
|
|
|
|
|
|
|
Balance, January 1 |
|
$ |
1,768 |
|
|
$ |
1,485 |
|
Total realized and unrealized gains included in noninterest income |
|
|
161 |
|
|
|
166 |
|
Net purchases, sales, calls, and maturities |
|
|
613 |
|
|
|
117 |
|
Balance, December 31 |
|
$ |
2,542 |
|
|
$ |
1,768 |
|
|
|
|
|
|
|
|
|
|
Investment Securities, Available for Sale |
|
|
|
|
|
|
|
|
Balance, January 1 |
|
$ |
21,050 |
|
|
$ |
11,423 |
|
Total unrealized gains/(losses) included in other comprehensive income |
|
|
- |
|
|
|
1,720 |
|
Net purchases, sales, calls, and maturities |
|
|
- |
|
|
|
7,907 |
|
Transfer to held to maturity |
|
|
(21,050 |
) |
|
|
- |
|
Balance, December 31 |
|
$ |
- |
|
|
$ |
21,050 |
|
Of the Level 3 assets that were held by the Company at December 31, 2022, the net unrealized gain as of December 31, 2022 was $161,000, compared to $591,000 as of December 31, 2021. The change in the net unrealized gain or loss is recognized in noninterest income or other comprehensive income in the consolidated balance sheets and income statements. Amounts recognized in noninterest income relate to changes in equity securities. A total of $613,000 and $8,839,000 of Level 3 securities were purchased in 2022 and 2021, respectively.
Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 assets and liabilities. As a result, the unrealized gains and losses for these assets and liabilities presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs.
Available for sale investment securities categorized as Level 3 assets consist of bonds issued by local municipalities and a trust-preferred security. The Company estimates the fair value of these assets based on the present value of expected future cash flows using management’s best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate with the current market and other risks involved.
The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets are not normally measured at fair value, but can be subject to fair value adjustments in certain circumstances, such as impairment. Disclosures concerning assets measured at fair value on a non-recurring basis are as follows:
Assets Measured at Fair Value on a Non-recurring Basis
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
Balances at |
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
(Dollars in thousands) |
|
Dates |
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
Indicated |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Impaired Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
|
$ |
2,846 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,846 |
|
December 31, 2021 |
|
$ |
5,433 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
5,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
December 31, 2021 |
|
$ |
194 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired. The Company estimates the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). The changes in fair value consisted of charge-downs of impaired loans that were posted to the allowance for loan losses and write-downs of other real estate owned that were posted to a valuation account. The fair value of other real estate owned was based on appraisals or other reviews of property values, adjusted for estimated costs to sell.
Note 20 – Off-Balance Sheet Activities
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customers’ financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
The contractual amount of financial instruments with off-balance sheet risk was as follows at December 31:
|
|
2022 |
|
|
2021 |
|
|
|
Fixed |
|
|
Variable |
|
|
Fixed |
|
|
Variable |
|
(Dollars in thousands) |
|
Rate |
|
|
Rate |
|
|
Rate |
|
|
Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unused lines of credit and letters of credit |
|
$ |
54,523 |
|
|
$ |
148,497 |
|
|
$ |
63,001 |
|
|
$ |
275,170 |
|
Commitments to fund loans (at market rates) |
|
|
35,789 |
|
|
|
12,565 |
|
|
|
72,257 |
|
|
|
25,545 |
|
Commitments to fund loans are generally made for periods of 180 days or less. The fixed rate loan commitments have interest rates ranging from 2.375% to 6.00% and maturities ranging from 1 year to 30 years.
Note 21 – Regulatory Capital
ChoiceOne and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include: prohibiting the acceptance of brokered deposits; requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution. At year-end 2022 and 2021, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action.
Actual capital levels and minimum required levels for ChoiceOne and the Bank were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Required |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to be Well |
|
|
|
|
|
|
|
|
|
|
|
Minimum Required |
|
|
Capitalized Under |
|
|
|
|
|
|
|
|
|
|
|
for Capital |
|
|
Prompt Corrective |
|
(Dollars in thousands) |
|
Actual |
|
|
Adequacy Purposes |
|
|
Action Regulations |
|
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
December 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ChoiceOne Financial Services Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets) |
|
$ |
222,006 |
|
|
|
13.8 |
% |
|
$ |
128,545 |
|
|
|
8.0 |
% |
|
|
N/A |
|
|
|
N/A |
|
Common equity Tier 1 capital (to risk weighted assets) |
|
|
177,916 |
|
|
|
11.1 |
|
|
|
72,307 |
|
|
|
4.5 |
|
|
|
N/A |
|
|
|
N/A |
|
Tier 1 capital (to risk weighted assets) |
|
|
182,416 |
|
|
|
11.4 |
|
|
|
96,409 |
|
|
|
6.0 |
|
|
|
N/A |
|
|
|
N/A |
|
Tier 1 capital (to average assets) |
|
|
182,416 |
|
|
|
7.9 |
|
|
|
92,558 |
|
|
|
4.0 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ChoiceOne Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets) |
|
$ |
208,696 |
|
|
|
13.0 |
% |
|
$ |
128,294 |
|
|
|
8.0 |
% |
|
$ |
160,367 |
|
|
|
10.0 |
% |
Common equity Tier 1 capital (to risk weighted assets) |
|
|
201,077 |
|
|
|
12.5 |
|
|
|
72,165 |
|
|
|
4.5 |
|
|
|
104,239 |
|
|
|
6.5 |
|
Tier 1 capital (to risk weighted assets) |
|
|
201,077 |
|
|
|
12.5 |
|
|
|
96,220 |
|
|
|
6.0 |
|
|
|
128,294 |
|
|
|
8.0 |
|
Tier 1 capital (to average assets) |
|
|
201,077 |
|
|
|
8.7 |
|
|
|
92,449 |
|
|
|
4.0 |
|
|
|
115,562 |
|
|
|
5.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ChoiceOne Financial Services Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets) |
|
$ |
204,353 |
|
|
|
14.4 |
% |
|
$ |
113,604 |
|
|
|
8.0 |
% |
|
|
N/A |
|
|
|
N/A |
|
Common equity Tier 1 capital (to risk weighted assets) |
|
|
160,338 |
|
|
|
11.3 |
|
|
|
63,902 |
|
|
|
4.5 |
|
|
|
N/A |
|
|
|
N/A |
|
Tier 1 capital (to risk weighted assets) |
|
|
164,838 |
|
|
|
11.6 |
|
|
|
85,203 |
|
|
|
6.0 |
|
|
|
N/A |
|
|
|
N/A |
|
Tier 1 capital (to average assets) |
|
|
164,838 |
|
|
|
7.4 |
|
|
|
89,415 |
|
|
|
4.0 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ChoiceOne Bank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets) |
|
$ |
182,275 |
|
|
|
12.9 |
% |
|
$ |
113,444 |
|
|
|
8.0 |
% |
|
$ |
141,806 |
|
|
|
10.0 |
% |
Common equity Tier 1 capital (to risk weighted assets) |
|
|
174,587 |
|
|
|
12.3 |
|
|
|
63,813 |
|
|
|
4.5 |
|
|
|
92,174 |
|
|
|
6.5 |
|
Tier 1 capital (to risk weighted assets) |
|
|
174,587 |
|
|
|
12.3 |
|
|
|
85,083 |
|
|
|
6.0 |
|
|
|
113,444 |
|
|
|
8.0 |
|
Tier 1 capital (to average assets) |
|
|
174,587 |
|
|
|
7.8 |
|
|
|
89,289 |
|
|
|
4.0 |
|
|
|
111,611 |
|
|
|
5.0 |
|
Banking laws and regulations limit capital distributions by state-chartered banks. Generally, capital distributions are limited to undistributed net income for the current and prior two years. At December 31, 2022, approximately $53.3 million was available for the Bank to pay dividends to ChoiceOne assuming regulatory approval of any amount in excess of the applicable capital conservation buffer. ChoiceOne’s ability to pay dividends to shareholders is dependent on the payment of dividends from the Bank, which is restricted by state law and regulations.
Note 22 – Business Combinations
Community Shores Bank Corporation
ChoiceOne completed the acquisition of Community Shores Bank Corporation (“Community Shores”) with and into ChoiceOne, with ChoiceOne as the surviving entity, effective on July 1, 2020. Community Shores had 4 branch offices as of the date of the merger. 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.
During 2021 management finalized accounting for certain loans and deferred tax accounts, resulting in measurement period adjustments increasing the acquisition date fair value of loans by $828,000 and decreasing the acquisition date fair value of other assets by $268,000. As a result, goodwill recognized as a result of the acquisition was reduced by $560,000.
The table below presents the allocation of purchase price for the merger with Community Shores (dollars in thousands):
Purchase Price |
|
|
|
|
|
|
|
|
|
Consideration |
|
$ |
20,881 |
|
|
|
|
|
|
Net assets acquired: |
|
|
|
|
Cash and cash equivalents |
|
|
41,023 |
|
Securities available for sale |
|
|
20,023 |
|
Federal Home Loan Bank and Federal Reserve Bank stock |
|
|
300 |
|
Originated loans |
|
|
174,802 |
|
Premises and equipment |
|
|
6,204 |
|
Other real estate owned |
|
|
346 |
|
Deposit based intangible |
|
|
760 |
|
Other assets |
|
|
1,077 |
|
Total assets |
|
|
244,535 |
|
|
|
|
|
|
Non-interest bearing deposits |
|
|
65,499 |
|
Interest bearing deposits |
|
|
162,333 |
|
Total deposits |
|
|
227,832 |
|
Trust preferred securities |
|
|
3,039 |
|
Other liabilities |
|
|
136 |
|
Total liabilities |
|
|
231,007 |
|
|
|
|
|
|
Net assets acquired |
|
|
13,528 |
|
|
|
|
|
|
Goodwill |
|
$ |
7,353 |
|
County Bank Corp.
ChoiceOne completed the merger of County Bank Corp. (“County”) with and into ChoiceOne effective on October 1, 2019. County had 14 branch offices and one loan production office as of the date of the merger. Total assets of County as of October 1, 2019 were $673 million, including total loans of $424 million. Deposits acquired in the merger, the majority of which were core deposits, totaled $574 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 3,603,872 shares of ChoiceOne common stock with an approximate value of $108 million.
During 2020, management finalized accounting for acquired loans and deferred taxes. As a result, the acquisition date fair value of loans was decreased by $238,000, other liabilities were decreased by $502,000, and goodwill recognized as a result of the acquisition was reduced by $276,000.
The table below highlights the allocation of purchase price for the merger with County (dollars in thousands):
Purchase Price |
|
|
|
|
|
|
|
|
|
Consideration |
|
$ |
107,945 |
|
|
|
|
|
|
Net assets acquired: |
|
|
|
|
Cash and cash equivalents |
|
|
20,638 |
|
Equity securities at fair value |
|
|
474 |
|
Securities available for sale |
|
|
187,230 |
|
Federal Home Loan Bank and Federal Reserve Bank stock |
|
|
2,915 |
|
Loans to other financial institutions |
|
|
33,481 |
|
Originated loans |
|
|
390,116 |
|
Premises and equipment |
|
|
9,271 |
|
Other real estate owned |
|
|
1,364 |
|
Deposit based intangible |
|
|
6,359 |
|
Bank owned life insurance |
|
|
16,912 |
|
Other assets |
|
|
4,002 |
|
Total assets |
|
|
672,762 |
|
|
|
|
|
|
Non-interest bearing deposits |
|
|
124,113 |
|
Interest bearing deposits |
|
|
449,488 |
|
Total deposits |
|
|
573,601 |
|
Federal funds purchased |
|
|
3,800 |
|
Advances from Federal Home Loan Bank |
|
|
23,000 |
|
Other liabilities |
|
|
3,282 |
|
Total liabilities |
|
|
603,683 |
|
|
|
|
|
|
Net assets acquired |
|
|
69,079 |
|
|
|
|
|
|
Goodwill |
|
$ |
38,866 |
|
Note 23 – Subsequent Event
Sale of Derivatives
On March 15, 2023, ChoiceOne terminated all pay-floating/receive-fixed (“pay floating swap agreements”) interest rate swaps with a notational amount of $200.0 million which resulted in a loss of $4.2 million. The pay floating swap agreements were designated as cash flow hedges against specifically identified available-for-sale securities, cash and loans. The loss was capitalized to available for sale securities and loans on the statement of financial condition and will be amortized into interest income over 13 months, or the remaining period of the agreements.
With the rapid increase in interest rates during 2022 and 2023 the pay floating swap agreements were in a loss position. At termination, the expected negative carry for the remainder of the term was greater than the exit price of the agreements.
ChoiceOne has four remaining interest rate swaps with a total notional value of $400.1 million. These derivative instruments increase in value as long-term interest rates rise, which offsets the reduction in equity due to unrealized losses on securities available for sale.