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COFS Choiceone Financial Services

Filed: 13 May 21, 4:11pm
 


 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

 

 

For the quarterly period ended March 31, 2021

 

 

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

 

 

 

For the transition period from                to                

 

Commission File Number: 000-19202

 

ChoiceOne Financial Services, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Michigan
(State or Other Jurisdiction of
Incorporation or Organization)

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

 

 

109 East Division
Sparta, Michigan

(Address of Principal Executive Offices)


49345
(Zip Code)

 

 

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

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  

Yes ☒        No ☐

 

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

Yes ☒        No ☐

 

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

 

Large accelerated filer ☐

Accelerated filer ☐

 

 

Non-accelerated filer ☒

Smaller reporting company ☒

 

 

Emerging growth company ☐

 

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐        No ☒

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common stock

COFS

NASDAQ Capital Market

 

As of April 30, 2021, the Registrant had outstanding 7,806,482 shares of common stock.

 



 

 

 

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS

 

  

March 31,

  

December 31,

 

(Dollars in thousands)

 

2021

  

2020

 
  

(Unaudited)

  

(Audited)

 

Assets

        

Cash and due from banks

 $134,978  $79,169 

Time deposits in other financial institutions

  350   350 

Cash and cash equivalents

  135,328   79,519 
         

Equity securities at fair value (Note 2)

  3,804   2,896 

Securities available for sale (Note 2)

  722,627   574,787 

Federal Home Loan Bank stock

  3,824   3,824 

Federal Reserve Bank stock

  4,180   4,180 

Loans held for sale

  18,736   12,921 

Loans to other financial institutions

  7,312   35,209 

Loans (Note 3)

  1,035,083   1,069,668 

Allowance for loan losses (Note 3)

  (7,740)  (7,593)

Loans, net

  1,027,343   1,062,075 
         

Premises and equipment, net

  29,870   29,489 

Other real estate owned, net

  123   266 

Cash value of life insurance policies

  32,938   32,751 

Goodwill

  59,946   60,506 

Core deposit intangible

  4,961   5,269 

Other assets

  19,111   15,650 

Total assets

 $2,070,103  $1,919,342 
         

Liabilities

        

Deposits – noninterest-bearing

 $515,552  $477,654 

Deposits – interest-bearing

  1,324,412   1,196,924 

Total deposits

  1,839,964   1,674,578 

Borrowings

  3,484   9,327 
Subordinated debentures  3,115   3,089 

Other liabilities

  4,901   5,080 

Total liabilities

  1,851,464   1,692,074 
         

Shareholders' Equity

        

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

  0   0 

Common stock and paid-in capital, no par value; shares authorized: 12,000,000; shares outstanding: 7,802,285 at March 31, 2021 and 7,796,352 at December 31, 2020

  178,993   178,750 

Retained earnings

  42,012   37,490 

Accumulated other comprehensive income, net

  (2,366)  11,028 

Total shareholders’ equity

  218,639   227,268 

Total liabilities and shareholders’ equity

 $2,070,103  $1,919,342 

 

 

See accompanying notes to interim consolidated financial statements. 

 

2

 

 

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

 

  

Three Months Ended

 

(Dollars in thousands, except per share data)

 

March 31,

 
  

2021

  

2020

 

Interest income

        

Loans, including fees

 $12,682  $10,075 

Securities:

        

Taxable

  1,856   1,857 

Tax exempt

  1,097   368 

Other

  20   194 

Total interest income

  15,655   12,494 
         

Interest expense

        

Deposits

  880   1,385 

Advances from Federal Home Loan Bank

  1   136 

Other

  86   2 

Total interest expense

  967   1,523 
         

Net interest income

  14,688   10,971 

Provision for loan losses

  250   775 

Net interest income after provision for loan losses

  14,438   10,196 
         

Noninterest income

        

Customer service charges

  1,920   1,845 

Insurance and investment commissions

  273   126 

Gains on sales of loans

  2,146   1,743 

Net gains (losses) on sales of securities

  1   2 
Net gains on sales and write-downs of other assets  5   2 

Earnings on life insurance policies

  186   192 

Trust income

  172   170 

Change in market value of equity securities

  608   (389)

Other

  289   408 

Total noninterest income

  5,600   4,099 
         

Noninterest expense

        

Salaries and benefits

  7,168   5,128 

Occupancy and equipment

  1,555   1,270 

Data processing

  1,429   1,484 

Professional fees

  729   762 

Supplies and postage

  100   225 

Advertising and promotional

  145   148 

Intangible amortization

  307   353 

FDIC insurance

  152   68 

Other

  943   978 

Total noninterest expense

  12,528   10,416 
         

Income before income tax

  7,510   3,879 

Income tax expense

  1,272   625 
         

Net income

 $6,238  $3,254 
         

Basic earnings per share (Note 4)

 $0.80  $0.45 

Diluted earnings per share (Note 4)

 $0.80  $0.45 

Dividends declared per share

 $0.22  $0.20 

 

See accompanying notes to interim consolidated financial statements. 

 

3

 

 

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

 

  

Three Months Ended

 

(Dollars in thousands)

 

March 31,

 
  

2021

  

2020

 

Net income

 $6,238  $3,254 
         

Other comprehensive income:

        

Changes in net unrealized gains(losses) on investment securities available for sale, net of tax benefit of $3,560 and expense of $458 for the three months ended March 31, 2021 and March 31, 2020, respectively.

  (13,393)  1,725 
         

Reclassification adjustment for realized (gain) loss on sale of investment securities available for sale included in net income, net of tax expense of $0 and $0 for the three months ended March 31, 2021 and March 31, 2020, respectively.

  (1)  (2)
         

Other comprehensive income (loss), net of tax

  (13,394)  1,723 
         

Comprehensive income

 $(7,156) $4,977 

 

See accompanying notes to interim consolidated financial statements. 

 

4

 

 

ChoiceOne Financial Services, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

For the three months ended March 31

 

 

              

Accumulated

     
      

Common

      

Other

     
      

Stock and

      

Comprehensive

     
  

Number of

  

Paid in

  

Retained

  

Income/(Loss),

     

(Dollars in thousands, except per share data)

 

Shares

  

Capital

  

Earnings

  

Net

  

Total

 
                     

Balance, January 1, 2020

  7,245,088  $162,610  $28,051  $1,478  $192,139 
                     

Net income

          3,254       3,254 

Other comprehensive income

              1,723   1,723 

Shares issued

  3,656   106           106 

Effect of employee stock purchases

      4           4 

Stock options exercised and issued (1)

  789   -           0 

Stock-based compensation expense

      25           25 

Cash dividends declared ($0.20 per share)

          (1,449)      (1,449)
                     

Balance, March 31, 2020

  7,249,533  $162,745  $29,856  $3,201  $195,802 
                     
                     

Balance, January 1, 2021

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

Net income

          6,238       6,238 

Other comprehensive income

              (13,394)  (13,394)

Shares issued

  4,732   175           175 

Effect of employee stock purchases

  1,201   4           4 

Stock-based compensation expense

      64           64 

Cash dividends declared ($0.22 per share)

          (1,716)      (1,716)
                     

Balance, March 31, 2021

  7,802,285  $178,993  $42,012  $(2,366) $218,639 

 

(1) The amount shown represents the number of shares issued upon exercise of options, net of shares withheld for payment of certain taxes.  

 

See accompanying notes to interim consolidated financial statements. 

 

5

 

 

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

 

  

Three Months Ended

 

(Dollars in thousands)

 

March 31,

 
  

2021

  

2020

 

Cash flows from operating activities:

        

Net income

 $6,238  $3,254 

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

        

Provision for loan losses

  250   775 

Depreciation

  646   563 

Amortization

  1,949   718 

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

  214   112 

Net gains on sales of securities

  (1)  (2)

Net change in market value of equity securities

  (608)  389 

Gains on sales of loans

  (2,146)  (1,743)

Loans originated for sale

  (72,727)  (32,372)

Proceeds from loan sales

  68,637   29,614 

Earnings on bank-owned life insurance

  (186)  (192)

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

  (4)  0 

Proceeds from sales of other real estate owned

  270   64 
Costs capitalized to other real estate  0   (19)

Deferred federal income tax (benefit)/expense

  506   (281)

Net change in:

        

Other assets

  (3,952)  (3,354)

Other liabilities

  3,124   (17)

Net cash (used in)/provided by operating activities

  2,210   (2,491)
         

Cash flows from investing activities:

        

Maturities, prepayments and calls of securities available for sale

  12,918   9,633 

Purchases of securities available for sale

  (179,221)  (29,954)

Loan originations and payments, net

  63,084   1,776 

Additions to premises and equipment

  (1,038)  (412)

Net cash (used in)/provided by investing activities

  (104,257)  (18,957)
         

Cash flows from financing activities:

        

Net change in deposits

  165,386   18,797 

Payments on borrowings

  (5,843)  (10,010)

Issuance of common stock

  29   23 

Cash dividends

  (1,716)  (1,449)

Net cash provided by/(used in) financing activities

  157,856   7,361 
         

Net change in cash and cash equivalents

  55,809   (14,087)

Beginning cash and cash equivalents

  79,519   59,558 
         

Ending cash and cash equivalents

 $135,328  $45,471 
         

Supplemental disclosures of cash flow information:

        

Cash paid for interest

 $1,021  $1,508 

Cash paid for income taxes

  0   42 

Loans transferred to other real estate owned

  123   0 

 

See accompanying notes to interim consolidated financial statements.

 

6

 

ChoiceOne Financial Services, Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Explanatory Note

On July 1, 2020, ChoiceOne Financial Services, Inc. (“ChoiceOne” or the “Company”) completed the merger of Community Shores Bank Corporation ("Community Shores") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for periods ending after July 1, 2020 include the impact of the merger.

 

For additional details regarding the merger with Community Shores and the merger of County Bank Corp. ("County") with and into ChoiceOne, see Note 8 (Business Combination) of the Notes to the Consolidated Financial Statements included in this report.

 

Principles of Consolidation

The consolidated financial statements include ChoiceOne Financial Services, Inc. ("ChoiceOne"), its wholly-owned subsidiary, ChoiceOne Bank (the "Bank"), and ChoiceOne Bank’s wholly-owned subsidiaries: ChoiceOne Insurance Agencies, Inc. (the "Insurance Agency"), Lakestone Financial Services, Inc. ("Lakestone Financial"), and Community Shores Financial Services, Inc. (“Community Shores Financial”). Intercompany transactions and balances have been eliminated in consolidation. 

 

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

 

The accompanying unaudited consolidated financial statements and notes thereto reflect all adjustments ordinary in nature which are, in the opinion of management, necessary for a fair presentation of the Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020, the Consolidated Statements of Income for the three-month periods ended March 31, 2021 and March 31, 2020, the Consolidated Statements of Comprehensive Income for the three-month periods ended March 31, 2021 and March 31, 2020, the Consolidated Statements of Changes in Shareholders’ Equity for the three-month periods ended March 31, 2021 and March 31, 2020, and the Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2021 and March 31, 2020. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

 

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2020.

 

Use of Estimates

To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information.  These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided; therefore, future results could differ. These estimates and assumptions are subject to many risks and uncertainties, including changes in interest rates and other general economic, business and political conditions, including the effects of the COVID-19 pandemic, and its potential effects on the economic environment, our customers and our operations, as well as any changes to federal, state and local government laws, regulations and orders in connection with the pandemic.  Actual results may differ from those estimates.

 

Loans to Other Financial Institutions 

ChoiceOne Bank entered into an agreement with another financial institution to fund mortgage loans. Loans to other financial institutions are purchased participating interests in individual advances made to mortgage bankers nation-wide from an unaffiliated originating bank. The originating bank services these loans and cash flows on the individual advances (principal, interest, and fees) which are allocated pro-rata based on ownership in the participating interest, less fees paid for the servicing activity. The underlying collateral is generally made up of 1-4 family first residential mortgages owned by the mortgage banker and held for sale in the secondary market and have been underwritten using secondary market underwriting standards prior to purchasing the participating interest. Once the mortgage banker delivers the loan to the secondary market, the advance is required to be paid off, including ChoiceOne Bank’s participating interest. If the advance (in which ChoiceOne Bank has a participating interest) is outstanding over 90 days, the originating bank has the right to request the participating interest be paid off by the mortgage banker. The participating interests are subject to concentration risk to 14 different mortgage banks, with the largest creditor outstanding representing 22% of the total at March 31, 2021.

 

Credit risk associated with the participating interest is measured as an allowance for loan losses when necessary. Losses are charged off against the allowance when incurred and recoveries of loan charge-offs are recorded when received. At least quarterly, ChoiceOne Bank reviews the portfolios of participating interests for potential losses including any participating interest that is outstanding over 90 days (even if the advance and participating interest is current). At March 31, 2021, 12 of the 114 participating interests with principal balances totaling $2.1 million had balances outstanding over 30 days. At December 31, 2020, 26 of the 222 participating interests with principal balances totaling $6.4 million had balances outstanding over 30 days.  During the first quarter of 2021, there were 0 losses or charge-offs of participating interests.  Loans to other financial institutions are excluded from note 3.  As of March 31, 2021 and 2020 none of the loans to other financial institutions were classified as impaired or nonaccrual.  

 

Allowance for Loan Losses

The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses inherent in the consolidated loan portfolio. Management’s evaluation of the adequacy of the allowance is an estimate based on reviews of individual loans, assessments of the impact of current economic conditions on the portfolio and historical loss experience of seasoned loan portfolios. See Note 3 to the interim consolidated financial statements for additional information.

 

Management believes the accounting estimate related to the allowance for loan losses is a “critical accounting estimate” because (1) the estimate is highly susceptible to change from period to period because of assumptions concerning the changes in the types and volumes of the portfolios and economic conditions and (2) the impact of recognizing an impairment or loan loss could have a material effect on ChoiceOne’s assets reported on the balance sheets as well as its net income.

 

7

 

Stock Transactions

A total of 4,732 shares of common stock were issued to ChoiceOne’s Board of Directors for a cash price of $ 146,000 under the terms of the Directors’ Stock Purchase Plan in the first quarter of 2021. A total of 1,201 shares for a cash price of $ 29,000 were issued under the Employee Stock Purchase Plan in the first quarter of 2021

 

Stock-Based Compensation

ChoiceOne grants restricted stock units to a select group of employees under the Stock Incentive Plan of 2012. All of the restricted stock units are initially unvested and vest three years after the grant date. Certain additional vesting provisions apply. Each unit, once vested, is settled by delivery of one share of ChoiceOne common stock.

 

Reclassifications 

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

 

Recent Accounting Pronouncements

The Financial Accounting Standards Board ("FASB") issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance attempts to reflect an entity’s current estimate of all expected credit losses and broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity may apply methods that reasonably reflect its expectations of the credit loss estimate. Although an entity may still use its current systems and methods for recording the allowance for credit losses, under the new rules, the inputs used to record the allowance for credit losses generally will need to change to appropriately reflect an estimate of all expected credit losses and the use of reasonable and supportable forecasts. Additionally, credit losses on available-for-sale debt securities will have to be presented as an allowance rather than as a write-down. This ASU is effective for fiscal years beginning after December 15, 2022, and for interim periods within those years for companies considered a smaller reporting company with the Securities and Exchange Commission. ChoiceOne was classified as a smaller reporting company as of the determination date of November 15, 2019.  Management is currently evaluating the impact of this new ASU on its consolidated financial statements which may be significant.

 

Goodwill

Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit's fair value.  Accounting pronouncements allow a company to first perform a qualitative assessment for goodwill prior to a quantitative assessment (Step 1 assessment). If the results of the qualitative assessment indicate that it is more likely than not that goodwill is impaired, then a quantitative assessment must be performed. If not, there is no further assessment required. The Company acquired Valley Ridge Financial Corp. in 2006, County in 2019, and Community Shores in 2020, which resulted in the recognition of goodwill of $13.7 million, $38.9 million and $7.3 million, respectively.  

 

As a result of the decline in economic conditions triggered by the COVID-19 pandemic, the market valuations, including ChoiceOne’s stock price, saw a significant decline in March 2020.  These events indicated that goodwill may be impaired and resulted in management performing a qualitative goodwill impairment assessment as of the end of the first quarter of 2020. As a result of the analysis, management concluded that it was more-likely-than-not that the fair value of the reporting unit could be greater than its carrying amount.  Based on the results of its qualitative analysis, management believed that a quantitative analysis was not necessary as of March 31, 2020.

 

Management performed its annual qualitative assessment of goodwill as of June 30, 2020. In evaluating whether it is more likely than not that the fair value of ChoiceOne's operations was less than the carrying amount, management assessed the relevant events and circumstances such as the ones noted in ASC 350-20-35-3c. The analysis consisted of a review of ChoiceOne’s current and expected future financial performance, the potential impact of COVID-19 on the ability of ChoiceOne’s borrowers to comply with loan terms, and the impact that reductions in both short-term and long-term interest rates have had and may continue to have on net interest margin and mortgage sales activity. The share price and book value of ChoiceOne’s stock were also compared to the prior year. Management also compared average deal values for recent closed bank transactions to ChoiceOne transactions.  Despite ChoiceOne's market capitalization declining slightly from December 2019 to June 2020, ChoiceOne's financial performance remained positive. This was evidenced by the strong financial indicators, solid credit quality ratios, as well as the strong capital position of ChoiceOne. In addition, second quarter 2020 revenue reflected significant and continuing growth in ChoiceOne's residential mortgage banking business, as well as net SBA fees related to Payroll Protection Program ("PPP") loans funded during the second quarter of 2020. In assessing the totality of the events and circumstances, management determined that it was more likely than not that the fair value of the Bank’s operations, from a qualitative perspective, exceeded the carrying value as of June 30, 2020

 

Due to the potential impact of COVID-19 and any long term economic fallout that might occur, ChoiceOne engaged a third-party valuation firm to perform a quantitative analysis of goodwill as of November 30, 2020 ("the valuation date"). In deriving at the fair value of the reporting unit (ChoiceOne), the third-party firm assessed general economic conditions and outlook; industry and market considerations and outlook; the impact of recent events to financial performance; the market price of ChoiceOne’s common stock and other relevant events. In addition, the valuation relied on financial projections through 2025 and growth rates prepared by management. Based on the valuation prepared, it was determined that the ChoiceOne's estimated fair value of the reporting unit at the valuation date was greater than its book value and impairment of goodwill was not required.

 

Despite ChoiceOne's market capitalization declining slightly from December 2020 to March 2021, ChoiceOne's financial performance remained positive. This was evidenced by the strong financial indicators, solid credit quality ratios, as well as the strong capital position of ChoiceOne. In addition, first quarter 2021 revenue reflected significant and continuing growth driven by ChoiceOne' mortgage banking business, as well as net SBA fees related to Payroll Protection Program ("PPP") loans. 

 

Management concurred with the conclusion derived from the quantitative goodwill analysis performed as of the valuation date and determined that there were no material changes and that no triggering events have occurred that indicated impairment from the valuation date through March 31, 2021, and as a result that it is more likely than not that there was no goodwill impairment as of March 31, 2021.

 

During the first three months of 2021, management recorded two adjustment period entries to goodwill related to the merger with Community Shores.  The net effect of the adjustments decreased goodwill by $560,000.  

 

8

 
 

NOTE 2 – SECURITIES

 

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

 

  

March 31, 2021

 
      

Gross

  

Gross

     

(Dollars in thousands)

 

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

Equity securities

 $3,136  $708  $(40) $3,804 

 

  

December 31, 2020

 
      

Gross

  

Gross

     

(Dollars in thousands)

 

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

Equity securities

 $2,836  $60  $0  $2,896 

 

The fair value of securities available for sale and the related unrealized gains and losses recognized in accumulated other comprehensive income were as follows:

 

  

March 31, 2021

 
      

Gross

  

Gross

     

(Dollars in thousands)

 

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

U.S. Government and federal agency

 $2,005  $36  $0  $2,041 

U.S. Treasury notes and bonds

  11,954   51   (141)  11,864 

State and municipal

  429,772   7,209   (5,506)  431,475 

Mortgage-backed

  276,592   1,495   (6,164)  271,923 

Corporate

  1,956   34   0   1,990 

Trust preferred securities

  1,000   0   0   1,000 
Asset-backed securities  2,343   0   (9)  2,334 

Total

 $725,622  $8,825  $(11,820) $722,627 

 

  

December 31, 2020

 
      

Gross

  

Gross

     

(Dollars in thousands)

 

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

U.S. Government and federal agency

 $2,007  $44  $0  $2,051 

U.S. Treasury notes and bonds

  1,996   60   0   2,056 

State and municipal

  307,201   13,191   (24)  320,368 

Mortgage-backed

  246,085   1,510   (872)  246,723 

Corporate

  2,539   51   (1)  2,589 

Trust preferred securities

  1,000   0   0   1,000 

Total

 $560,828  $14,856  $(897) $574,787 

 

ChoiceOne reviews its securities portfolio on a quarterly basis to determine whether unrealized losses are considered to be temporary or other-than-temporary. NaN other-than-temporary impairment charges were recorded in the three months ended March 31, 2021 or in the same period in 2020. ChoiceOne believes that unrealized losses on securities were temporary in nature and were due to changes in interest rates and reduced market liquidity and not as a result of credit quality issues.

 

9

 

Presented below is a schedule of maturities of securities as of March 31, 2021, the fair value of securities as of March 31, 2021 and December 31, 2020, and the weighted average yields of securities as of March 31, 2021:

 

  

Securities maturing within:

         
                   Fair Value   Fair Value 
  

Less than

  

1 Year -

  

5 Years -

  

More than

  

at March 31,

  

at Dec. 31,

 

(Dollars in thousands)

 

1 Year

  

5 Years

  

10 Years

  

10 Years

  

2021

  

2020

 
                         

U.S. Government and federal agency

 $2,041  $0  $0  $0  $2,041  $2,051 

U.S. Treasury notes and bonds

  0   2,048   9,816   0   11,864   2,056 

State and municipal

  13,224   56,492   245,466   116,293   431,475   320,368 

Corporate

  958   1,032   0   0   1,990   2,589 

Trust preferred securities

  0   0   0   1,000   1,000   1,000 
Asset-backed securities  0   2,334   0   0   2,334   0 

Total debt securities

  16,223   61,906   255,282   117,293   450,704   328,064 
                         

Mortgage-backed securities

  2,762   75,355   186,889   6,917   271,923   246,723 

Equity securities

  0   1,000   0   2,804   3,804   2,896 

Total

 $18,985  $138,261  $442,171  $127,014  $726,431  $577,683 

 

  

Weighted average yields:

 
  

Less than

  

1 Year -

  

5 Years -

  

More than

     
  

1 Year

  

5 Years

  

10 Years

  

10 Years

  

Total

 

U.S. Government and federal agency

  1.98

%

  0

%

  0

%

  0

%

  1.98

%

U.S. Treasury notes and bonds

  0   1.85   0   0   1.30 

State and municipal

  3.02   2.88   2.57   2.34   2.56 

Corporate

  2.63   2.86   0   0   2.75 

Trust preferred securities

  0   0   0   0   3.75 
Asset-backed securities  0   0.94   0   0   0.94 

Mortgage-backed securities

  4.94   1.81   1.09   1.73   1.35 

Equity securities

  0   4.61   0   0   1.21 

 

Following is information regarding unrealized gains and losses on equity securities for the three-month periods ended March 31, 2021 and 2020:

 

  

Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 
         

Net gains and losses recognized during the period

 $608  $(389)

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

  0   0 
         

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

 $608  $(389)

 

10

 
 

NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES

 

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

 

      

Commercial

                         

(Dollars in thousands)

     

and

      

Commercial

  

Construction

  

Residential

         
  

Agricultural

  

Industrial

  

Consumer

  

Real Estate

  

Real Estate

  

Real Estate

  

Unallocated

  

Total

 

Allowance for Loan Losses Three Months Ended March 31, 2021

                                

Beginning balance

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

Charge-offs

  0   (74)  (71)  (48)  0   0   0   (193)

Recoveries

  0   9   79   0   0   2   0   90 

Provision

  85   337   (78)  215   (23)  (278)  (8)  250 

Ending balance

 $342  $1,599  $247  $4,345  $74  $1,024  $109  $7,740 
                                 

Individually evaluated for impairment

 $114  $2  $0  $10  $0  $213  $0  $339 
                                 

Collectively evaluated for impairment

 $227  $1,596  $246  $4,337  $75  $811  $109  $7,401 
                                 

Loans

                                

March 31, 2021

                                

Individually evaluated for impairment

 $3,173  $1,626  $0  $3,001  $0  $2,589      $10,389 

Collectively evaluated for impairment

  43,513   290,140   32,311   448,261   15,670   174,562       1,004,457 

Acquired with deteriorated credit quality

  0   6,284   19   11,159   0   2,775       20,237 

Ending balance

 $46,686  $298,050  $32,330  $462,421  $15,670  $179,926      $1,035,083 

 

11

 

 

      

Commercial

                         

(Dollars in thousands)

     

and

      

Commercial

  

Construction

  

Residential

         
  

Agricultural

  

Industrial

  

Consumer

  

Real Estate

  

Real Estate

  

Real Estate

  

Unallocated

  

Total

 

Allowance for Loan Losses Three Months Ended March 31, 2020

                                

Beginning balance

 $471  $655  $270  $1,663  $76  $640  $282  $4,057 

Charge-offs

  0   0   (89)  0   0   0   0   (89)

Recoveries

  0   1   44   0   0   2   0   47 

Provision

  (124)  197   (5)  297   48   419   (57)  775 

Ending balance

 $347  $853  $220  $1,960  $124  $1,061  $225  $4,790 
                                 

Individually evaluated for impairment

 $98  $0  $1  $13  $0  $266  $0  $378 
                                 

Collectively evaluated for impairment

 $249  $853  $219  $1,947  $124  $795  $225  $4,412 
                                 
                                 

Loans

                                

March 31, 2020

                                

Individually evaluated for impairment

 $379  $259  $16  $2,272  $0  $2,449      $5,375 

Collectively evaluated for impairment

  50,104   136,989   34,236   348,365   17,525   213,706       800,925 
Acquired with deteriorated credit quality  0   3,953   0   1,116   0   208       5,277 

Ending balance

 $50,483  $141,201  $34,252  $351,753  $17,525  $216,363      $811,577 

 

12

 
      

Commercial

                         

(Dollars in thousands)

     

and

      

Commercial

  

Construction

  

Residential

         
  

Agricultural

  

Industrial

  

Consumer

  

Real Estate

  

Real Estate

  

Real Estate

  

Unallocated

  

Total

 
Allowance for Loan Losses                                

December 31, 2020

                                

Individually evaluated for impairment

 $0  $19  $1  $157  $0  $254  $0  $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

  0   6,710   24   12,534   0   2,804       22,072 

Ending balance

 $53,735  $303,527  $34,014  $469,247  $16,639  $192,506      $1,069,668 

 

The provision for loan losses was $250,000 in the first quarter of 2021, compared to $775,000 in the same period in the prior year. The first quarter of 2021 provision was deemed prudent due to changes in the risk profile of ChoiceOne’s loan portfolio and the economic impact on ChoiceOne's local market areas and the national economy resulting from the COVID-19 pandemic upon ChoiceOne’s borrowers and their ability to repay loans. While it is difficult to predict the impact that COVID-19 will have in future quarters, ChoiceOne estimates these losses have been incurred as of March 31, 2021, and expects increased levels of past due loans, nonperforming loans and loan losses.

 

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.

 

13

 

Information regarding ChoiceOne Bank's credit exposure was as follows:

 

Corporate Credit Exposure - Credit Risk Profile By Creditworthiness Category

 

(Dollars in thousands)

 

Agricultural

  

Commercial and Industrial

  

Commercial Real Estate

 
  

March 31,

  

December 31,

  

March 31,

  

December 31,

  

March 31,

  

December 31,

 
  

2021

  

2020

  

2021

  

2020

  

2021

  

2020

 

Pass

 $43,145  $50,185  $289,781  $294,614  $449,666  $453,080 

Special Mention

  368   3,202   2,109   4,101   3,674   6,006 

Substandard

  3,173   348   6,160   4,812   9,081   8,925 

Doubtful

  0   0   0   0   0   1,236 
  $46,686  $53,735  $298,050  $303,527  $462,421  $469,247 

 

Consumer Credit Exposure - Credit Risk Profile Based On Payment Activity

 

(Dollars in thousands)

 

Consumer

  

Construction Real Estate

  

Residential Real Estate

 
  

March 31,

  

December 31,

  

March 31,

  

December 31,

  

March 31,

  

December 31,

 
  

2021

  

2020

  

2021

  

2020

  

2021

  

2020

 

Performing

 $32,330  $34,006  $15,670  $16,559  $178,650  $191,125 

Nonperforming

  0   0   0   0   0   0 

Nonaccrual

  0   8   0   80   1,276   1,381 
  $32,330  $34,014  $15,670  $16,639  $179,926  $192,506 

 

The following table provides information on loans that were considered troubled debt restructurings ("TDRs") that were modified during the three months ended March 31, 2021. There were 0 new TDRs in the three months ended March 31, 2020.

 

  

Three Months Ended March 31, 2021

 
      

Pre-

  

Post-

 
      

Modification

  

Modification

 
      

Outstanding

  

Outstanding

 

(Dollars in thousands)

 

Number of

  

Recorded

  

Recorded

 
  

Loans

  

Investment

  

Investment

 

Agricultural

  6  $2,326  $2,326 

Commercial Real Estate

  1   958   958 

Total

  7  $3,284  $3,284 

 

The following schedule provides information on TDRs as of March 31, 2021 where the borrower was past due with respect to principal and/or interest for 30 days or more during the three months ended March 31, 2021, which loans had been modified and classified as TDRs during the year prior to the default.  There were no TDRs as of March 31, 2020 where the borrower was past due with respect to principal and/or interest for 30 days or more during the three months ended March 31, 2020, which loans had been modified and classified as TDRs during the year prior to the default.  

 

  

Three Months Ended

 
  

March 31, 2021

 

(Dollars in thousands)

 

Number

  

Recorded

 
  

of Loans

  

Investment

 

Commercial and industrial

  1  $52 

Commercial Real Estate

  3   1,850 

Total

  4  $1,902 

 

14

 

In March of 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed into law. Among other things, the CARES Act provides that certain loans subject to modifications related to the COVID-19 pandemic need not be classified as TDRs.   Further, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” on March 22, 2020, followed by a revised statement on April 7, 2020, providing in part that short-term modifications to loans made on a good faith basis to borrowers who were current as of the implementation date of the statements are not considered TDRs. As a result of the pandemic, the Company provided a modification program to borrowers that included certain concessions such as interest only payments or payment deferrals. As of March 31, 2021, the Company had granted pandemic-related modifications on approximately 17 loans totaling $1.2 million which, in reliance on the statements of federal banking agencies and the CARES Act, are not reflected as TDRs in this report. A total of 17 deferments with loan balances totaling approximately $1.2 million remained active at March 31, 2021, with all other previous deferments resuming their payments in accordance with loan terms.    

 

Impaired loans by loan category follow:

 

      

Unpaid

     

(Dollars in thousands)

 

Recorded

  

Principal

  

Related

 
  

Investment

  

Balance

  

Allowance

 

March 31, 2021

            

With no related allowance recorded

            

Agricultural

 $348  $434  $- 

Commercial and industrial

  1,463   1,574   - 

Consumer

  0   0   - 

Construction real estate

  0   0   - 

Commercial real estate

  2,624   3,429   - 

Residential real estate

  172   176   - 

Subtotal

  4,607   5,613   - 

With an allowance recorded

            

Agricultural

  2,825   2,825   114 

Commercial and industrial

  163   165   2 

Consumer

  0   0   0 

Construction real estate

  0   0   0 

Commercial real estate

  377   384   10 

Residential real estate

  2,417   2,495   212 

Subtotal

  5,782   5,869   338 

Total

            

Agricultural

  3,173   3,259   114 

Commercial and industrial

  1,626   1,739   2 

Consumer

  0   0   0 

Construction real estate

  0   0   0 

Commercial real estate

  3,001   3,813   10 

Residential real estate

  2,589   2,671   212 

Total

 $10,389  $11,482  $338 

 

      

Unpaid

     

(Dollars in thousands)

 

Recorded

  

Principal

  

Related

 
  

Investment

  

Balance

  

Allowance

 

December 31, 2020

            

With no related allowance recorded

            

Agricultural

 $348  $434  $- 

Commercial and industrial

  1,516   1,629   - 

Consumer

  0   0   - 

Construction real estate

  80   80   - 

Commercial real estate

  1,852   2,664   - 

Residential real estate

  162   162   - 

Subtotal

  3,958   4,969   - 

With an allowance recorded

            

Agricultural

  0   0   0 

Commercial and industrial

  147   147   19 

Consumer

  8   8   1 

Construction real estate

  0   0   0 

Commercial real estate

  1,180   1,180   157 

Residential real estate

  2,558   2,651   254 

Subtotal

  3,893   3,986   431 

Total

            

Agricultural

  348   434   0 

Commercial and industrial

  1,663   1,776   19 

Consumer

  9   8   1 

Construction real estate

  80   80   0 

Commercial real estate

  3,031   3,844   157 

Residential real estate

  2,720   2,813   254 

Total

 $7,851  $8,955  $431 

 

15

 

The following schedule provides information regarding average balances of impaired loans and interest recognized on impaired loans for the three-month periods ended March 31, 2021 and 2020:

 

  

Average

  

Interest

 

(Dollars in thousands)

 

Recorded

  

Income

 
  

Investment

  

Recognized

 

Three Months Ended March 31, 2021

        

With no related allowance recorded

        

Agricultural

 $348  $0 

Commercial and industrial

  1,490   0 

Consumer

  0   0 

Construction real estate

  40   0 

Commercial real estate

  2,238   3 

Residential real estate

  166   1 

Subtotal

  4,282   4 

With an allowance recorded

        

Agricultural

  1,413   0 

Commercial and industrial

  155   0 

Consumer

  4   0 

Construction real estate

  0   0 

Commercial real estate

  778   4 

Residential real estate

  2,488   17 

Subtotal

  4,838   21 

Total

        

Agricultural

  1,761   0 

Commercial and industrial

  1,645   0 

Consumer

  4   0 

Construction real estate

  40   0 

Commercial real estate

  3,016   7 

Residential real estate

  2,654   18 

Total

 $9,120  $25 

 

 

  

Average

  

Interest

 

(Dollars in thousands)

 

Recorded

  

Income

 
  

Investment

  

Recognized

 

Three Months Ended March 31, 2020

        

With no related allowance recorded

        

Agricultural

 $272  $0 

Commercial and industrial

  259   0 

Consumer

  0   0 

Construction real estate

  0   0 

Commercial real estate

  1,882   0 

Residential real estate

  59   0 

Subtotal

  2,472   0 

With an allowance recorded

        

Agricultural

  379   0 

Commercial and industrial

  7   0 

Consumer

  16   0 

Construction real estate

  0   0 

Commercial real estate

  391   7 

Residential real estate

  2,383   30 

Subtotal

  3,176   37 

Total

        

Agricultural

  651   0 

Commercial and industrial

  266   0 

Consumer

  17   0 

Construction real estate

  0   0 

Commercial real estate

  2,272   7 

Residential real estate

  2,442   30 

Total

 $5,648  $37 

 

16

 

An aging analysis of loans by loan category follows:

 

          

Loans

                 
  

Loans

  

Loans

  

Past Due

              

Loans

 
  

Past Due

  

Past Due

  

Greater

              

90 Days Past

 

(Dollars in thousands)

 30 to 59  60 to 89  

Than 90

      

Loans Not

  

Total

  

Due and

 
  

Days (1)

  

Days (1)

  

Days (1)

  

Total (1)

  

Past Due

  

Loans

  

Accruing

 

March 31, 2021

                            

Agricultural

 $0  $0  $0  $0  $46,686  $46,686  $0 

Commercial and industrial

  182   0   413   595   297,455   298,050   0 

Consumer

  11   0   0   11   32,319   32,330   0 

Commercial real estate

  184   0   1,666   1,850   460,571   462,421   0 

Construction real estate

  492   0   0   492   15,178   15,670   0 

Residential real estate

  1,742   0   79   1,821   178,105   179,926   0 
  $2,611  $0  $2,158  $4,769  $1,030,314  $1,035,083  $0 
                             

December 31, 2020

                            

Agricultural

 $0  $0  $0  $0  $53,735  $53,735  $0 

Commercial and industrial

  0   109   515   624   302,903   303,527   0 

Consumer

  39   0   0   39   33,975   34,014   0 

Commercial real estate

  532   44   1,744   2,320   466,927   469,247   0 

Construction real estate

  1,076   180   80   1,336   15,303   16,639   0 

Residential real estate

  1,563   256   352   2,171   190,335   192,506   0 
  $3,210  $589  $2,691  $6,490  $1,063,178  $1,069,668  $0 

 

(1) Includes nonaccrual loans.

 

Nonaccrual loans by loan category follow:

 

(Dollars in thousands)

 

March 31,

  

December 31,

 
  

2021

  

2020

 

Agricultural

 $348  $348 

Commercial and industrial

  1,699   1,802 

Consumer

  0   8 

Commercial real estate

  1,850   3,088 

Construction real estate

  0   80 

Residential real estate

  1,276   1,381 
  $5,173  $6,707 

 

17

 

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

 

  Acquired  Acquired  Acquired 
  

Impaired

  

Non-impaired

  

Total

 

Loans acquired - contractual payments

 $7,729  $387,394  $395,123 

Nonaccretable difference

  (2,928)  0   (2,928)

Expected cash flows

  4,801   387,394   392,195 

Accretable yield

  (185)  (1,894)  (2,079)

Carrying balance at acquisition date

 $4,616  $385,500  $390,116 

 

The table below presents a roll forward of the accretable yield on County Bank Corp. acquired loan portfolio for the three months ended March 31, 2021 (dollars in thousands):

 

(Dollars in thousands)

 

Acquired

  

Acquired

  

Acquired

 
  

Impaired

  

Non-impaired

  

Total

 
Balance, January 1, 2019 $0  $0  $0 
Merger with County Bank Corp on October 1, 2019  185   1,894   2,079 
Accretion October 1, 2019 through December 31, 2019  0   (75)  (75)

Balance, January 1, 2020

  185   1,819   2,004 
Accretion January 1, 2020 through December 31, 2020  (50)  (295)  (345)
Balance, December 31, 2020  135   1,524   1,659 
Accretion January 1, 2021 through March 31, 2021  (5)  (76)  (81)
Balance, March 31, 2021 $130  $1,448  $1,578 

 

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)  0   (2,719)

Expected cash flows

  17,772   158,495   176,267 

Accretable yield

  (869)  (596)  (1,465)

Carrying balance at acquisition date

 $16,903  $157,899  $174,802 

 

 

The table below presents a roll forward of the accretable yield on Community Shores Bank Corporation acquired loan portfolio for the three months ended March 31, 2021 (dollars in thousands):

 

  

Impaired

  

Non-impaired

  

Total

 

Balance, January 1, 2020

 $0  $0  $0 
Merger with Community Shores Bank Corporation on July 1, 2020  869   596   1,465 

Accretion July 1, 2020 through December 31, 2020

  (26)  (141)  (167)
Balance, December 31, 2020  843   455   1,298 
Accretion January 1, 2021 through March 31, 2021  (328)  (198)  (526)
Balance, March 31, 2021 $515  $257  $772 

 

18

 
 

NOTE 4 – EARNINGS PER SHARE

 

Earnings per share are based on the weighted average number of shares outstanding during the period. A computation of basic earnings per share and diluted earnings per share follows:

 

  

Three Months Ended

 

(Dollars in thousands, except share data)

 

March 31,

 
  

2021

  

2020

 

Basic

        

Net income

 $6,238  $3,254 
         

Weighted average common shares outstanding

  7,801,058   7,247,772 
         

Basic earnings per common shares

 $0.80  $0.45 
         

Diluted

        

Net income

 $6,238  $3,254 
         

Weighted average common shares outstanding

  7,801,058   7,247,772 

Plus dilutive stock options and restricted stock units

  9,732   14,633 
         

Weighted average common shares outstanding and potentially dilutive shares

  7,810,790   7,262,405 
         

Diluted earnings per common share

 $0.80  $0.45 

 

There were no stock options that were considered to be anti-dilutive to earnings per share for the three months ended March 31, 2021 or March 31, 2020.

 

19

 
 

Note 5 – Financial Instruments

 

Financial instruments as of the dates indicated were as follows: 

 

          

Quoted Prices

         
          

In Active

  

Significant

     
          

Markets for

  

Other

  

Significant

 
          

Identical

  

Observable

  

Unobservable

 

(Dollars in thousands)

 

Carrying

  

Estimated

  

Assets

  

Inputs

  

Inputs

 
  

Amount

  

Fair Value

  

(Level 1)

  

(Level 2)

  

(Level 3)

 

March 31, 2021

                    

Assets

                    

Cash and cash equivalents

 $135,328  $135,328  $135,328  $0  $0 

Equity securities at fair value

  3,804   3,804   1,859   0   1,945 

Securities available for sale

  722,627   722,627   0   709,021   13,606 

Federal Home Loan Bank and Federal

                    

Reserve Bank stock

  8,004   8,004   0   8,004   0 

Loans held for sale

  18,736   19,298   0   19,298   0 

Loans to other financial institutions

  7,312   7,312   0   7,312   0 

Loans, net

  1,027,343   1,024,203   0   0   1,024,203 

Accrued interest receivable

  7,751   7,751   0   7,751   0 
Interest rate lock commitments  1,756   1,756   0   1,756   0 
                     

Liabilities

                    

Noninterest-bearing deposits

  515,552   515,552   0   515,552   0 

Interest-bearing deposits

  1,324,412   1,324,629   0   1,324,629   0 

Borrowings

  3,484   3,265   0   3,265   0 
Subordinated debentures  3,115   2,918   0   2,918   0 

Accrued interest payable

  129   129   0   129   0 
                     

December 31, 2020

                    

Assets

                    

Cash and due from banks

 $79,519  $79,519  $79,519  $0  $0 

Equity securities at fair value

  2,896   2,896   1,411   0   1,485 

Securities available for sale

  574,787   574,787   0   563,364   11,423 

Federal Home Loan Bank and Federal

                    

Reserve Bank stock

  8,004   8,004   0   8,004   0 

Loans held for sale

  12,921   13,350   0   13,350   0 

Loans to other financial institutions

  35,209   35,209   0   35,209   0 

Loans, net

  1,062,075   1,057,786   0   0   1,057,786 

Accrued interest receivable

  6,521   6,521   0   6,521   0 
Interest rate lock commitments  842   842   0   842   0 
                     

Liabilities

                    

Noninterest-bearing deposits

  477,654   477,654   0   477,654   0 

Interest-bearing deposits

  1,196,924   1,197,964   0   1,197,964   0 
Borrowings  9,327   9,143   0   9,143   0 

Subordinated debentures

  3,089   3,089   0   3,089   0 

Accrued interest payable

  183   183   0   183   0 

 

20

 
 

NOTE 6 – FAIR VALUE MEASUREMENTS

 

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

 

In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that ChoiceOne Bank has the ability to access.

 

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

 

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.

 

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. ChoiceOne Bank’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

 

There were no liabilities measured at fair value as of March 31, 2021 or December 31, 2020. Disclosures concerning assets measured at fair value are as follows:

 

Assets Measured at Fair Value on a Recurring Basis

 

  

Quoted Prices

             
  

In Active

  

Significant

         
  

Markets for

  

Other

  

Significant

     
  

Identical

  

Observable

  

Unobservable

  

Balance

 

(Dollars in thousands)

 

Assets

  

Inputs

  

Inputs

  

at Date

 
  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Indicated

 

Equity Securities Held at Fair Value - March 31, 2021

                

Equity securities

 $1,859  $0  $1,945  $3,804 
                 

Investment Securities, Available for Sale - March 31, 2021

                

U. S. Government and federal agency

 $0  $2,041  $0  $2,041 

U. S. Treasury notes and bonds

  0   11,864   0   11,864 

State and municipal

  0   418,869   12,606   431,475 

Mortgage-backed

  0   271,923   0   271,923 

Corporate

  0   1,990   0   1,990 
Trust preferred securities  0   0   1,000   1,000 
Asset-backed securities  0   2,334   0   2,334 

Total

 $0  $709,021  $13,606  $722,627 
                 

Equity Securities Held at Fair Value - December 31, 2020

                

Equity securities

 $1,411  $0  $1,485  $2,896 
                 

Investment Securities, Available for Sale - December 31, 2020

                

U. S. Government and federal agency

 $0  $2,051  $0  $2,051 

U. S. Treasury notes and bonds

  0   2,056   0   2,056 

State and municipal

  0   309,945   10,423   320,368 

Mortgage-backed

  0   246,723   0   246,723 

Corporate

  0   2,589   0   2,589 

Trust preferred securities

  0   0   1,000   1,000 

Total

 $0  $563,364  $11,423  $574,787 
21

 

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

 

  

Three Months Ended

 

(Dollars in thousands)

 

March 31,

 
  

2021

  

2020

 

Equity Securities Held at Fair Value

        

Balance, January 1

 $1,485  $1,472 

Total realized and unrealized gains included in noninterest income

  (40)  (65)

Net purchases, sales, calls, and maturities

  500   0 

Net transfers into Level 3

  0   0 

Balance, March 31

 $1,945  $1,407 
         

Investment Securities, Available for Sale

        

Balance, January 1

 $11,423  $12,367 

Total unrealized gains included in other comprehensive income

  (270)  185 

Net purchases, sales, calls, and maturities

  2,453   - 

Net transfers into Level 3

  0   0 

Balance, March 31

 $13,606  $12,552 

 

Of the available for sale Level 3 assets that were held by ChoiceOne at March 31, 2021, the net unrealized gain as of March 31, 2021 was $826,000, which was recognized in accumulated other comprehensive income in the consolidated balance sheet. 

 

Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 investment securities and liabilities. As a result, the unrealized gains and losses for these assets and liabilities presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs.

 

Securities categorized as Level 3 assets primarily consist of bonds issued by local municipalities and common and preferred equity securities of community banks. ChoiceOne estimates the fair value of these bonds and equity securities based on the present value of expected future cash flows using management’s best estimate of key assumptions, including forecasted interest yield and payment rates, credit quality and a discount rate commensurate with the current market and other risks involved.

 

ChoiceOne also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets are not normally measured at fair value, but can be subject to fair value adjustments in certain circumstances, such as impairment.  Disclosures concerning assets measured at fair value on a non-recurring basis are as follows:

 

Assets Measured at Fair Value on a Non-recurring Basis

 

      

Quoted Prices

         
      

In Active

  

Significant

     
      

Markets for

  

Other

  

Significant

 
  

Balances at

  

Identical

  

Observable

  

Unobservable

 

(Dollars in thousands)

 

Dates

  

Assets

  

Inputs

  

Inputs

 
  

Indicated

  

(Level 1)

  

(Level 2)

  

(Level 3)

 

Impaired Loans

                

March 31, 2021

 $10,389  $0  $0  $10,389 

December 31, 2020

 $7,851  $0  $0  $7,851 
                 

Other Real Estate

                

March 31, 2021

 $123  $0  $0  $123 

December 31, 2020

 $266  $0  $0  $266 
                 
Mortgage Loan Servicing Rights                
March 31, 2021 $4,336  $0  $0  $4,336 
December 31, 2020 $3,967  $0  $0  $3,967 

  

Impaired loans categorized as Level 3 assets consist of non-homogeneous loans that are considered impaired.  ChoiceOne estimates the fair value of the loans based on the present value of expected future cash flows using management’s estimate of key assumptions.  These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). The changes in fair value consisted of charge-downs of impaired loans that were posted to the allowance for loan losses and write-downs of other real estate that were posted to a valuation account.

 

22

 
 

NOTE 7 – REVENUE FROM CONTRACTS WITH CUSTOMERS

 

ChoiceOne has a variety of sources of revenue, which include interest and fees from customers as well as revenue from non-customers.  ASC Topic 606, Revenue from Contracts With Customers, covers certain sources of revenue that are classified within noninterest income in the Consolidated Statements of Income.  Sources of revenue that are included in the scope of ASC Topic 606 include service charges and fees on deposit accounts, interchange income, investment asset management income and transaction-based revenue, and other charges and fees for customer services.

 

Service Charges and Fees on Deposit Accounts

Revenue includes charges and fees to provide account maintenance, overdraft services, wire transfers, funds transfer, and other deposit-related services.  Account maintenance fees such as monthly service charges are recognized over the period of time that the service is provided.  Transaction fees such as wire transfer charges are recognized when the service is provided to the customer.

 

Interchange Income

Revenue includes debit card interchange and network revenues.  This revenue is earned on debit card transactions that are conducted through payment networks such as MasterCard. The revenue is recorded as services are delivered and is presented net of interchange expenses.

 

Investment Commission Income

Revenue includes fees from the investment management advisory services and revenue is recognized when services are rendered.  Revenue also includes commissions received from the placement of brokerage transactions for purchase or sale of stocks or other investments. Commission income is recognized when the transaction has been completed.

 

Trust Fee Income

Revenue includes fees from the management of trust assets and from other related advisory services. Revenue is recognized when services are rendered.

 

Following is noninterest income separated by revenue within the scope of ASC 606 and revenue within the scope of other GAAP topics:

 

  

Three Months Ended

 
  

March 31,

 

(Dollars in thousands)

 

2021

  

2020

 
         

Service charges and fees on deposit accounts

 $785  $1,009 

Interchange income

  1,135   836 

Investment commission income

  236   119 

Trust fee income

  173   170 

Other charges and fees for customer services

  166   147 

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

  2,495   2,281 

Noninterest income within the scope of other GAAP topics

  3,105   1,818 

Total noninterest income

 $5,600  $4,099 

 

23

 
 

NOTE 8 – BUSINESS COMBINATION

 

Community Shores Bank Corporation

ChoiceOne completed the acquisition of Community Shores Bank Corporation (“Community Shores”) with and into ChoiceOne, with ChoiceOne as the surviving entity, effective on July 1, 2020. Community Shores had 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, which was net of 84 fractional shares not issued, and cash in the amount of $5,390,000 with an approximate total value of $20.9 million.  The initial accounting for the business combination has been determined provisionally for the fair value of certain assets and liabilities, including loans, core deposit intangible, and deferred taxes.  During the quarter ended March 31, 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.  Management expects to finalize calculations supporting the fair value of these assets and liabilities during the measurement period.

 

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 1 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, which was net of 299 fractional shares not issued, with an approximate value of $108 million.

 

The table below presents 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 

 

 

24

 
 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion is designed to provide a review of the consolidated financial condition and results of operations of ChoiceOne Financial Services, Inc. (“ChoiceOne”), its wholly-owned subsidiary ChoiceOne Bank, and ChoiceOne Bank’s wholly-owned subsidiaries, ChoiceOne Insurance Agencies, Inc., Lakestone Financial Services, Inc., and Community Shores’ Financial Services, Inc.  This discussion should be read in conjunction with the interim consolidated financial statements and related notes.

 

FORWARD-LOOKING STATEMENTS

 

This discussion and other sections of this quarterly report contain forward-looking statements that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and ChoiceOne.  Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “may,” “could,” “look forward,” “continue”, “future”, and variations of such words and similar expressions are intended to identify such forward-looking statements.  Management’s determination of the provision and allowance for loan losses, the carrying value of goodwill, loan servicing rights, other real estate owned, and the fair value of investment securities (including whether any impairment on any investment security is temporary or other-than-temporary and the amount of any impairment) and management’s assumptions concerning pension and other postretirement benefit plans involve judgments that are inherently forward-looking.  Examples of forward-looking statements also include, but are not limited to, statements related to risks and uncertainties related to, and the impact of, the global coronavirus (COVID-19) pandemic on the businesses, financial condition and results of operations of ChoiceOne and its customers and statements regarding the outlook and expectations of ChoiceOne and its customers.  The COVID-19 pandemic is adversely affecting ChoiceOne and its customers, counterparties, employees, and third-party service providers.  The ultimate extent of the impacts on ChoiceOne's business, financial position, results of operations, liquidity, and prospects is uncertain.  All of the information concerning interest rate sensitivity is forward-looking.  All statements with references to future time periods are forward-looking.  These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“risk factors”) that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence.  Therefore, actual results and outcomes may materially differ from what may be expressed, implied or forecasted in such forward-looking statements.  Furthermore, ChoiceOne undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.

 

Additional risk factors include, but are not limited to, the risk factors discussed in Item 1A of ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2020. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

 

25

 

RESULTS OF OPERATIONS

 

Net income for the first quarter of 2021 was $6,238,000, which represented an increase of $2,984,000 or 92% compared to the first quarter period in 2020.  Growth in net income in the first quarter of 2021 compared to the same period in the prior year resulted in part from the effects of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act and Paycheck Protection Program ("PPP") fees and deposit dollars resulting from the Act.  The merger with Community Shores Bank Corporation ("Community Shores") that was effective on July 1, 2020 also had an impact on ChoiceOne's financial results. There were no merger expenses in the first quarter of 2021; however, net income was impacted by $282,000 of costs related to the merger with Community Shores in the first quarter of 2020. Net income, adjusted to exclude tax-effected merger-related expenses, would have been $3,536,000 in the first quarter of 2020.

 

Basic and diluted earnings per common share were $0.80 for the first quarter of 2021 compared to $0.45 or $0.49 adjusted to exclude the tax-effected merger-related expenses for the first quarter of the prior year.  The return on average assets and return on average shareholders’ equity percentages were 1.25% and 11.13%, respectively, for the first quarter of 2021, compared to 0.93% and 6.60%, respectively, for the same period in 2020.

 

Net income, basic earnings per share, and diluted earnings per share excluding tax-effected merger-related expenses are non-GAAP financial measures.  Please refer to the section below titled “Non-GAAP Financial Measures” for a reconciliation to the most directly comparable GAAP financial measures.

 

Acquisition of Community Shores Bank Corporation

ChoiceOne completed the acquisition of Community Shores Bank Corporation (“Community Shores”) with and into ChoiceOne effective on July 1, 2020. Community Shores had 4 branch offices as of the date of the acquisition. Total assets of Community Shores as of July 1, 2020 were $244.5 million, including total loans of $174.8 million. Deposits acquired in the merger, the majority of which were core deposits, totaled $227.8 million. The impact of the merger has been included in ChoiceOne’s results of operations since the effective date of the merger. As consideration in the merger, ChoiceOne issued 524,139 shares of ChoiceOne common stock and cash in the amount of $5,390,000 with an approximate total value of $20.9 million.  The consolidation of Community Shores Bank with and into ChoiceOne Bank was completed on October 16, 2020.

  

The Coronavirus (COVID-19) Outbreak

The coronavirus outbreak (COVID-19) has had a substantial impact on numerous aspects of life in the United States, including threats to public health, government imposed restrictions on business and gatherings, increased volatility in markets, and severe effects on national and local economies.

 

COVID-19 has affected ChoiceOne's customers. Although there were no material increases in delinquencies or net charge-offs in the first quarter of 2021, ChoiceOne recorded a provision for loan losses of $250,000 related to the impact of COVID-19. Consistent with federal banking agencies' “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus,” ChoiceOne is working with its borrowers affected by COVID-19 and has granted approximately 750 payment deferrals on numerous loans to borrowers affected by the pandemic from March of 2020 through June of 2020.  Following the initial 90 day deferment period, ChoiceOne offered a second round of deferment in accordance with the CARES act; however, significantly fewer customers requested further deferment.  As of March 31, 2021, approximately 17 deferments remained active with loan balances totaling $1.2 million with all other previous deferments resuming their payments in accordance with loan terms. 

 

In addition, ChoiceOne processed over $126 million in Paycheck Protection Program ("PPP") loans in 2020 and acquired an additional $37 million in PPP loans in the merger with Community Shores.  PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. PPP loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven in whole or in part.  Payments are deferred until either the date on which the Small Business Administration ("SBA") remits the amount of forgiveness proceeds to the lender or the date that is ten months after the last day of the covered period if the borrower does not apply for forgiveness within that ten-month period.  The loans are 100% guaranteed by the SBA.  The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. Upon SBA forgiveness, unrecognized fees are then recognized into interest income.  In the first quarter of 2021, $56.4 million of Paycheck Protection Program (PPP) loans were forgiven resulting in $1.4 million of fee income.  Another round of PPP loans was offered in the first quarter of 2021. ChoiceOne added 718 PPP loans to its portfolio in the first quarter of 2021 with a balance of $76.7 million.  Fee income related to new PPP loans amounted to $3.7 million, of which $208,000 was recognized in the first quarter of 2021.

 

Dividends

Cash dividends of $1,716,000 or $0.22 per share were declared in the first quarter of 2021, compared to $1,449,000 or $0.20 per share declared in the first quarter of 2020.  The cash dividend payout percentage was 28% for the first quarter of 2021, compared to 45% in the same period in the prior year.

 

Interest Income and Expense

Tables 1 and 2 on the following pages provide information regarding interest income and expense for the three-month periods ended March 31, 2021 and 2020.  Table 1 documents ChoiceOne’s average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities.  Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates.  These tables are referred to in the discussion of interest income, interest expense and net interest income.

 

26

 

Table 1 – Average Balances and Tax-Equivalent Interest Rates

 

 

Three Months Ended March 31,

 
 

2021

 

2020

 

(Dollars in thousands)

Average

     

Average

     
 

Balance

 

Interest

 

Rate

 

Balance

 

Interest

 

Rate

 

Assets:

            

Loans (1)

$ 1,080,181

 

$ 12,687

 

4.70

%

$ 830,107

 

$ 10,081

 

4.86

%

Taxable securities (2)

438,575

 

1,856

 

1.69

 

239,104

 

1,857

 

3.11

 

Nontaxable securities (1)

201,228

 

1,390

 

2.76

 

113,130

 

467

 

1.65

 

Other

84,822

 

20

 

0.09

 

54,451

 

194

 

1.43

 

Interest-earning assets

1,804,806

 

15,953

 

3.54

 

1,236,792

 

12,599

 

4.07

 

Noninterest-earning assets

184,954

     

170,324

     

Total assets

$ 1,989,760

     

$ 1,407,116

     
             

Liabilities and Shareholders' Equity:

            

Interest-bearing demand deposits

$ 715,868

 

$ 429

 

0.24

%

$ 502,240

 

$ 656

 

0.52

%

Savings deposits

355,395

 

114

 

0.13

 

213,108

 

40

 

0.08

 

Certificates of deposit

195,093

 

337

 

0.69

 

179,076

 

689

 

1.54

 

Borrowings

8,462

 

36

 

1.70

 

26,956

 

138

 

2.05

 

Subordinated debentures

3,099

 

52

 

6.65

 

-

 

-

 

0.00

 

Interest-bearing liabilities

1,277,917

 

968

 

0.30

 

921,380

 

1,523

 

0.66

 

Demand deposits

479,649

     

279,905

     

Other noninterest-bearing liabilities

7,937

     

8,719

     

Total liabilities

1,765,503

     

1,210,004

     

Shareholders' equity

224,257

     

197,112

     

Total liabilities and shareholders' equity

$ 1,989,760

     

$ 1,407,116

     
             

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

  

$ 14,985

     

$ 11,076

   
             

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

    

3.23

%

    

3.42

%

             

Reconciliation to Reported Net Interest Income

            

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

  

$ 14,985

     

$ 11,076

   

Adjustment for taxable equivalent interest

  

(297)

     

(105)

   

Net interest income  (GAAP)

  

$ 14,688

     

$ 10,971

   

Net interest margin (GAAP)

    

3.32

%

    

3.58

%

             

 

(1)

Adjusted to a fully tax-equivalent basis to facilitate comparison to the taxable interest-earning assets. The adjustment uses an incremental tax rate of 21%.  The presentation of these measures on a tax-equivalent basis is not in accordance with GAAP, but is customary in the banking industry.  These non-GAAP measures ensure comparability with respect to both taxable and tax-exempt loans and securities.

 

(2)

Taxable securities include dividend income from Federal Home Loan Bank and Federal Reserve Bank stock.

 

27

 

Table 2 – Changes in Tax-Equivalent Net Interest Income

 

 

Three Months Ended March 31,

(Dollars in thousands)

2021 Over 2020

 

Total

 

Volume

 

Rate

Increase (decrease) in interest income (1)

     

Loans (2)

$ 2,606

 

$ 4,769

 

$ (2,163)

Taxable securities

(1)

 

4,383

 

(4,384)

Nontaxable securities (2)

923

 

495

 

428

Other

(174)

 

479

 

(653)

Net change in interest income

3,354

 

10,126

 

(6,772)

      

Increase (decrease) in interest expense (1)

     

Interest-bearing demand deposits

(227)

 

1,142

 

(1,369)

Savings deposits

74

 

39

 

35

Certificates of deposit

(352)

 

376

 

(728)

Borrowings

(102)

 

(82)

 

(20)

Subordinated debentures

52

 

52

 

-

Net change in interest expense

(555)

 

1,527

 

(2,082)

Net change in tax-equivalent net interest income

$ 3,909

 

$ 8,599

 

$ (4,690)

 

 

 

(1)

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

 

(2)

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

 

Net Interest Income

Tax-equivalent net interest income increased $3.9 million in the first three months of 2021 compared to the same period in 2020 partially due to $1.6 million in PPP loan fees recognized during the first quarter of 2021, partially offset by a reduction in ChoiceOne’s net interest margin. Net interest margin on a tax-equivalent basis declined by 19 basis points from 3.42% in the first quarter of 2020 to 3.23% in the same period in 2021. 

 

The average balance of loans increased $250.1 million in the first quarter of 2021 compared to the same period in 2020.  $174.8 million of the increase was due to the impact of the merger with Community Shores which closed on July 1, 2020 with the remaining increase due to PPP loans which were originated after the first quarter of 2020.  The increase in the average loans balance was partially offset by a 16 basis points decline in the average rate earned. Part of the decrease was caused by short-term market interest rates which were reduced 150 basis points by the Federal Open Market Committee in March 2020. PPP loans with an interest rate of 1.00% also reduced the overall rate earned on loans during the first quarter of 2021.  The combination of these factors caused tax-equivalent interest income from loans to increase $2.6 million in the first quarter of 2021 compared to the same period in the prior year. The average balance of total securities increased $287.6 million in the first quarter of 2021 compared to the same period in 2020. The securities portfolio has grown as ChoiceOne has deployed excess deposit dollars into sufficiently short-term securities to allow loans to grow organically as good credits become available.  The effect of the average balance growth, partially offset by a combined 61 basis point reduction in the average rate earned on securities, caused tax-equivalent securities income to increase $922,000 in the first quarter of 2021 compared to the same quarter in 2020. 

 

28

 

Growth of $355.9 million in the average balance of interest-bearing demand deposits and savings deposits, partially offset by a 19 basis point decrease in the average rate paid, caused interest expense to be $153,000 lower in the first three months of 2021 compared to the first three months of the prior year. The average balance of certificates of deposit increased $16.0 million in the first three months of 2021 compared to the same period in 2020. The growth was overshadowed by a reduction of 85 basis points in the average rate paid on certificates which caused interest expense to decrease $352,000 in the first three months of 2021 compared to the same period in 2020.

 

Provision and Allowance for Loan Losses

The provision for loan losses was $250,000 in the first quarter 2021, compared to $775,000 in the same period in the prior year. The provision in the first quarter of 2021 was deemed prudent due to changes in the risk profile of ChoiceOne’s loan portfolio and the economic impact on ChoiceOne's local market areas and the national economy resulting from the COVID-19 pandemic. Nonperforming loans were $10.0 million as of March 31, 2021, compared to $8.2 million as of December 31, 2020.  The allowance for loan losses was 0.75% of total loans at March 31, 2021, compared to 0.71% at December 31, 2020.  Loans acquired in the mergers with County and Community Shores were recorded at fair value and as a result do not have an allowance for loan losses allocated to them unless credit deteriorates subsequent to acquisition. If the credit mark associated with the loans acquired in the mergers were added to the allowance for loan losses, the total would have represented 1.52% of total loans at March 31, 2021.

 

Charge-offs and recoveries for respective loan categories for the three months ended March 31, 2021 and 2020 were as follows:

 

(Dollars in thousands)

 

2021

  

2020

 
  

Charge-offs

  

Recoveries

  

Charge-offs

  

Recoveries

 

Agricultural

 $-  $-  $-  $- 

Commercial and industrial

  74   9   -   1 

Consumer

  71   79   89   44 

Commercial real estate

  48   -   -   - 

Construction real estate

  -   -   -   - 

Residential real estate

  -   2   -   2 
  $193  $90  $89  $47 

 

Net charge-offs were $102,000 in the first quarter of 2021, compared to net charge-offs of $42,000 during the same period in 2020. Net charge-offs on an annualized basis as a percentage of average loans were 0.04% in the first three months of 2021 compared to annualized net charge-offs of 0.02% of average loans in the same period in the prior year. Management is aware that the economic climate in Michigan will continue to affect business and individual borrowers. Management believes that COVID-19 will also have an impact in the remainder of 2021 and beyond. Management has worked and intends to continue to work with delinquent borrowers in an attempt to lessen the impact of COVID-19 on ChoiceOne. 

 

ChoiceOne has allocated approximately $2.1 million in the allowance for loan losses to borrowers falling into industry classification codes that management believes to be highly or moderately affected by the pandemic.  The following chart indicates industries management believes to be moderately or highly effected by the pandemic:

 

Highly Affected 
Moderately Affected
Accommodation 
Ambulatory Health Care Services
Amusement, Gambling, and Recreation Industries 
Educational Services
Food Services and Drinking Places
 Merchant Wholesalers, Durable Goods
Performing Arts, Spectator Sports, and Related Industries
 Merchant Wholesalers, Nondurable Goods
Rental and Leasing Services 
Miscellaneous Store Retailers
Scenic and Sightseeing Transportation 
Motion Picture and Sound Recording Industries
Transit and Ground Passenger Transportation 
Real Estate

 

Loans highly affected and moderately affected based on their commercial industry category have been allocated an additional 35 basis points and 25 basis points, respectively.  ChoiceOne has also allocated 25 basis points to all retail loan categories.  It is noted that this allowance amount is in addition to the regularly calculated allowance based on risk rating and qualitative factors.  ChoiceOne will continue to monitor concentrations as part of its analysis on an ongoing basis. Management will continue to monitor charge-offs, changes in the level of nonperforming loans, changes within the composition of the loan portfolio and the impact of COVID-19, and it will adjust the provision and allowance for loan losses as determined to be necessary.

 

Noninterest Income

Total noninterest income increased $1.5 million in the first quarter of 2021 compared to the same period in 2020.  While increased scale was a factor, most of the increase was related to a difference in the change in the market value of equity securities from a negative $389,000 in the first quarter of 2020 to a positive $608,000 in the first quarter of 2021.  The stock market dipped sharply in March 2020 related to the COVID-19 pandemic which affected securities held by ChoiceOne.  Since that time ChoiceOne has seen the value of equity investments held climb to pre-pandemic levels.  Mortgage activity continued to remain strong with an increase of $403,000 in gains on sales of loans in the first quarter of 2021 compared to the same period in 2020, as lower interest rates continued to encourage refinancing activity.  Insurance and investment commissions increased $147,000 in the first quarter of 2021 compared to the same period in 2020, due in part to the addition of Community Shores Financial Services Inc., a wholly owned subsidiary acquired during the merger with Community Shores.  

 

Noninterest Expense

Total noninterest expense increased $2.1 million in the first quarter of 2021 compared to the same period in 2020. All categories included expenses as a result of the merger with Community Shores that was effective on July 1, 2020.  Salaries and benefits included a higher level of commission expense in the first quarter of 2021 compared to the same period in the prior year as a result of the significant increase in residential mortgage loan originations. Data processing expense declined in the first quarter of 2021 as compared to the same period in 2020, as the prior year included some conversion expenses from ChoiceOne's merger with County, which closed on October 1, 2019.  Supplies and postage also declined in the first quarter of 2021 compared the same period in the prior year as ChoiceOne continues to move mailings digital when applicable.  The intangible amortization expense in 2021 represented the amortization of the core deposit intangible that resulted from the mergers with County and Community Shores.

 

Income Tax Expense

Income tax expense was $1,272,000 in the first quarter of 2021 compared to $625,000 for the same period in 2020.  The increase was due to a higher level of income before income tax.  The effective tax rate was 16.9% for the first quarter of 2021 and 16.1% for the first quarter of 2020.

 

29

 

 

FINANCIAL CONDITION

 

Securities

Total securities increased $148.7 million from December 31, 2020 to March 31, 2021.  Various securities totaling $179.2 million were purchased in the first three months of 2021.  There were no sales in the first three months of 2021; however, $2.6 million of securities called or matured during that same time period. Principal repayments on securities totaled $10.3 million in the first three months of 2021.  ChoiceOne believes the portfolio will provide a natural hedge for floating rate loans and investments are sufficiently short-term to allow organic growth in loans as good credits become available.

 

Loans

Loans held for sale were $5.8 million higher at March 31, 2021 than at December 31, 2020. This was caused by a heightened level of refinancing activity of residential mortgage loans due to the low market interest rates that persisted through the first quarter in 2021.  Loans excluding loans held for sale and loans to other financial institutions declined by $34.6 million from December 31, 2020 to March 31, 2021.  This decline was due to $56.4 million of PPP loans forgiven as well as other paydowns partially offset by the addition of $76.7 million of new PPP loan production.  ChoiceOne saw declines of $12.6 million in residential real estate loans, $7.0 million in agricultural loans, $6.8 million in commercial real estate loans, $5.3 million in commercial and industrial loans, and $1.7 million of consumer loans.  The other changes resulted from normal fluctuations in borrower activity.

 

Asset Quality

Information regarding impaired loans can be found in Note 3 to the consolidated financial statements included in this report.  The total balance of loans classified as impaired was $10.4 million at March 31, 2021, compared to $7.9 million as of December 31, 2020.  The change in the first three months of 2021 was primarily comprised of an increase of $2.8 million in impaired agricultural loans in the first quarter of 2021.

 

As part of its review of the loan portfolio, management also monitors the various nonperforming loans.  Nonperforming loans are comprised of: (1) loans accounted for on a nonaccrual basis; (2) loans, not included in nonaccrual loans, which are contractually past due 90 days or more as to interest or principal payments; and (3) loans, not included in nonaccrual or loans past due 90 days or more, which are considered troubled debt restructurings ("TDRs").

 

The balances of these nonperforming loans were as follows:

 

(Dollars in thousands)

 

March 31,

  

December 31,

 
  

2021

  

2020

 

Loans accounted for on a nonaccrual basis

 $5,173  $6,707 

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

  -   - 

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

  4,807   1,537 

Total

 $9,980  $8,244 

 

The increase in the TDR loans balance in the first three months of 2021 was primarily due to a $2.3 million increase in TDR agricultural loans.  Approximately 70% of the balance of loans considered TDRs were performing according to their restructured terms as of March 31, 2021.  Management believes the allowance for loan losses allocated to its nonperforming loans was sufficient at March 31, 2021.

 

In March of 2020, the CARES Act was passed into law. Among other things, the CARES Act provides that certain loans subject to modifications related to the COVID-19 pandemic need not be classified as TDRs.   Further, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” on March 22, 2020, followed by a revised statement on April 7, 2020, providing in part that short-term modifications to loans made on a good faith basis to borrowers who were current as of the implementation date of the statements are not considered TDRs. As a result of the pandemic, the Company provided a modification program to borrowers that included certain concessions such as interest only payments or payment deferrals. As of March 31, 2021, the Company had granted pandemic-related modifications on approximately 17 loans totaling $1.2 million which, in reliance on the statements of federal banking agencies and the CARES Act, are not reflected as TDRs in this report.

 

30

 

Goodwill

As a result of the decline in economic conditions triggered by the COVID-19 pandemic, the market valuations, including ChoiceOne’s stock price, saw a significant decline in March 2020.  These events indicated that goodwill may be impaired and resulted in management performing a qualitative goodwill impairment assessment as of the end of the first quarter of 2020. As a result of the analysis, management concluded that it was more-likely-than-not that the fair value of the reporting unit could be greater than its carrying amount.  Based on the results of its qualitative analysis, management believed that a quantitative analysis was not necessary as of March 31, 2020.

 

Management performed its annual qualitative assessment of goodwill as of June 30, 2020. In evaluating whether it is more likely than not that the fair value of ChoiceOne's operations was less than the carrying amount, management assessed the relevant events and circumstances such as the ones noted in ASC 350-20-35-3c. The analysis consisted of a review of ChoiceOne’s current and expected future financial performance, the potential impact of COVID-19 on the ability of ChoiceOne’s borrowers to comply with loan terms, and the impact that reductions in both short-term and long-term interest rates have had and may continue to have on net interest margin and mortgage sales activity. The share price and book value of ChoiceOne’s stock were also compared to the prior year. Management also compared average deal values for recent closed bank transactions to ChoiceOne transactions.  Despite ChoiceOne's market capitalization declining slightly from December 2019 to June 2020, ChoiceOne's financial performance remained positive. This was evidenced by the strong financial indicators, solid credit quality ratios, as well as the strong capital position of ChoiceOne. In addition, second quarter 2020 revenue reflected significant and continuing growth in ChoiceOne's residential mortgage banking business, as well as net SBA fees related to Payroll Protection Program ("PPP") loans funded during the second quarter of 2020. In assessing the totality of the events and circumstances, management determined that it was more likely than not that the fair value of the Bank’s operations, from a qualitative perspective, exceeded the carrying value as of June 30, 2020.

 

Due to the potential impact of COVID-19 and any long term economic fallout that might occur, ChoiceOne engaged a third-party valuation firm to perform a quantitative analysis of goodwill as of November 30, 2020 ("the valuation date"). In arriving at the fair value of the reporting unit (the Bank), the third-party firm assessed general economic conditions and outlook; industry and market considerations and outlook; the impact of recent events to financial performance; the market price of ChoiceOne’s common stock and other relevant events. In addition, the valuation relied on financial projections through 2025 and growth rates prepared by management. Based on the valuation prepared, it was determined that ChoiceOne's estimated fair value of the reporting unit at the valuation date was greater than its book value and impairment of goodwill was not required.

 

Despite ChoiceOne's market capitalization declining slightly from December 2020 to March 2021, ChoiceOne's financial performance remained positive. This was evidenced by the strong financial indicators, solid credit quality ratios, as well as the strong capital position of ChoiceOne. In addition, first quarter 2021 revenue reflected significant and continuing growth driven by ChoiceOne' mortgage banking business, as well as net SBA fees related to Payroll Protection Program ("PPP") loans.

 

Management concurred with the conclusion derived from the quantitative goodwill analysis performed as of the valuation date of November 30, 2020 and determined that there were no material changes and that no triggering events have occurred that indicated impairment from the valuation date through March 31, 2021, and as a result that it is more likely than not that there was no goodwill impairment as of March 31, 2021.  During the first three months of 2021, management recorded two adjustment period entries to goodwill related to the merger with Community Shores.  The net effect of the adjustments decreased goodwill by $560,000.  

 

Deposits and Borrowings

Total deposits increased $165.4 million in the first quarter of 2021.  The change in checking and savings accounts was due in part to funds related to the stimulus package included in the CARES Act as well as funds on deposit from the PPP loans that were not fully utilized as of March 31, 2021. Seasonal fluctuations for ChoiceOne’s depositors also contributed to the growth in 2021 as tax refunds typically come in during the first quarter of the year.

 

Total borrowings declined $5.8 million in the first quarter 2021 as ChoiceOne made payments on its holding company term loan.  ChoiceOne also holds $3.1 million in subordinated debentures obtained in the merger with Community Shores that represented a $4.5 million subordinated debt offering, offset by the merger mark-to-market adjustment.   ChoiceOne may use Federal Home Loan Bank advances and advances from the Federal Reserve Bank Discount Window to meet short-term funding needs if needed in the remainder of 2021.

 

Shareholders' Equity

Total shareholders' equity decreased $8.6 million in the first quarter of 2021.  Accumulated other comprehensive income declined $13.4 million in the first quarter of 2021 as a result of market value declines in ChoiceOne’s available for sale securities. The change was caused by increases in certain general market interest rates in the first three months of 2021.  The decline in accumulated other comprehensive income was partially offset by net income, net of dividends paid.

 

 

31

 

Regulatory Capital Requirements

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

 

                  

Minimum Required

 
                  

to be Well

 
          

Minimum Required

  

Capitalized Under

 
          

for Capital

  

Prompt Corrective

 

(Dollars in thousands)

 

Actual

  

Adequacy Purposes

  

Action Regulations

 
  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 

March 31, 2021

                        

ChoiceOne Financial Services Inc.

                        

Total capital (to risk weighted assets)

  168,338   13.5

%

  99,581   8.0

%

  N/A   N/A 

Common equity Tier 1 capital (to risk weighted assets) weighted assets)

  156,098   12.5   56,014   4.5   N/A   N/A 

Tier 1 capital (to risk weighted assets)

  156,098   12.5   74,686   6.0   N/A   N/A 

Tier 1 capital (to average assets)

  156,098   8.1   77,229   4.0   N/A   N/A 
                         

ChoiceOne Bank

                        

Total capital (to risk weighted assets)

  163,242   13.1

%

  99,430   8.0

%

  124,288   10.0

%

Common equity Tier 1 capital (to risk weighted assets) weighted assets)

  155,502   12.5   55,930   4.5   80,787   6.5 

Tier 1 capital (to risk weighted assets)

  155,502   12.5   74,573   6.0   99,430   8.0 

Tier 1 capital (to average assets)

  155,502   8.1   77,144   4.0   96,430   5.0 
                         
                         

December 31, 2020

                        

ChoiceOne Financial Services Inc.

                        

Total capital (to risk weighted assets)

 $162,558   13.2

%

 $98,835   8.0

%

  N/A   N/A 

Common equity Tier 1 capital (to risk weighted assets) weighted assets)

  150,465   12.2   55,595   4.5   N/A   N/A 

Tier 1 capital (to risk weighted assets)

  150,465   12.2   74,126   6.0   N/A   N/A 

Tier 1 capital (to average assets)

  150,465   8.3   72,281   4.0   N/A   N/A 
                         

ChoiceOne Bank

                        

Total capital (to risk weighted assets)

 $159,684   12.9

%

 $98,683   8.0

%

 $123,353   10.0

%

Common equity Tier 1 capital (to risk weighted assets) weighted assets)

  152,091   12.3   55,409   4.5   80,180   6.5 

Tier 1 capital (to risk weighted assets)

  152,091   12.3   74,012   6.0   98,683   8.0 

Tier 1 capital (to average assets)

  152,091   8.4   72,208   4.0   90,259   5.0 

 

Management reviews the capital levels of ChoiceOne and ChoiceOne Bank on a regular basis. The Board of Directors and management believe that the capital levels as of March 31, 2021 are adequate for the foreseeable future. The Board of Directors’ determination of appropriate cash dividends for future periods will be based on, among other things, market conditions and ChoiceOne’s requirements for cash and capital.

 

Liquidity

Net cash provided by operating activities was $2.2 million for the three months ended March 31, 2021 compared to net cash used of $2.5 million in the same period a year ago.  The change was primarily due to $3.0 million more in net income in the current year than the prior year and a $2.9 million net positive change in other liabilities.   Net cash used in investing activities was $104.3 million for the first three months of 2021 compared to $19.0 million used in the same period in 2020. $179.2 million of cash used to purchase securities was offset by cash provided of $63.1 million in net loan originations.  Net cash provided by financing activities was $157.9 million in the three months ended March 31, 2021, compared to $7.4 million provided in the same period in the prior year. Higher growth of $165.4 million in deposits in the first quarter of 2021 compared to $18.8 million in the same quarter in the prior year was the main driver of the year over year change.

 

ChoiceOne believes that the current level of liquidity is sufficient to meet ChoiceOne Bank's normal operating needs. This belief is based upon the availability of deposits from both the local and national markets, maturities of securities, normal loan repayments, income retention, federal funds purchased from correspondent banks, advances available from the Federal Home Loan Bank, and secured lines of credit available from the Federal Reserve Bank.

 

32

 

 

NON-GAAP FINANCIAL MEASURES

 

This report contains references to net income, basic earnings per share, and diluted earnings per share excluding tax-effected merger expenses, each of which is a financial measure that is not defined in U.S. generally accepted accounting principles (“GAAP”). Management believes these non-GAAP financial measures provide additional information that is useful to investors in helping to understand the underlying financial performance of ChoiceOne.

 

Non-GAAP financial measures have inherent limitations. Readers should be aware of these limitations and should be cautious with respect to the use of such measures. To compensate for these limitations, we use non-GAAP measures as comparative tools, together with GAAP measures, to assist in the evaluation of our operating performance or financial condition. Also, we ensure that these measures are calculated using the appropriate GAAP or regulatory components in their entirety and that they are computed in a manner intended to facilitate consistent period-to-period comparisons. ChoiceOne’s method of calculating these non-GAAP financial measures may differ from methods used by other companies. These non-GAAP financial measures should not be considered in isolation or as a substitute for those financial measures prepared in accordance with GAAP or in-effect regulatory requirements.

 

A reconciliation of these non-GAAP financial measures follows:

 

Non-GAAP Reconciliation 

(Unaudited)

 

The non-GAAP measures presented in the table below reflect the adjustments of the reported U.S. GAAP results for significant items that management does not believe are reflective of ChoiceOne’s current and ongoing operations.

 

  

Three Months Ended March 31,

 

(In Thousands, Except Per Share Data)

 

2021

  

2020

 
         

Income before income tax

 $7,510  $3,879 

Adjustment for pre-tax merger expenses

  -   302 

Adjusted income before income tax

 $7,510  $4,181 
         

Income tax expense

 $1,272  $625 

Tax impact of adjustment for pre-tax merger expenses

  -   20 

Adjusted income tax expense

 $1,272  $645 
         

Net income

 $6,238  $3,254 

Adjustment for pre-tax merger expenses, net of tax impact

  -   282 

Adjusted net income

 $6,238  $3,536 
         

Basic earnings per share

 $0.80  $0.45 

Effect of merger expenses, net of tax impact

  0.00   0.04 

Adjusted basic earnings per share

 $0.80  $0.49 
         

Diluted earnings per share

 $0.80  $0.45 

Effect of merger expenses, net of tax impact

  0.00   0.04 

Adjusted diluted earnings per share

 $0.80  $0.49 

 

Item 4.  Controls and Procedures.

 

An evaluation was performed under the supervision and with the participation of ChoiceOne’s management, including the Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of ChoiceOne’s disclosure controls and procedures as of March 31, 2021. Based on and as of the time of that evaluation, ChoiceOne’s management, including the Chief Executive Officer and Principal Financial Officer, concluded that ChoiceOne’s disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that material information required to be disclosed in the reports that ChoiceOne files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that ChoiceOne files or submits under the Exchange Act is accumulated and communicated to management, including ChoiceOne’s principal executive and principal financial officers, as appropriate to allow for timely decisions regarding required disclosure. There was no change in ChoiceOne’s internal control over financial reporting that occurred during the three months ended March 31, 2021 that has materially affected, or that is reasonably likely to materially affect, ChoiceOne’s internal control over financial reporting.

 

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PART II.  OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

There are no material pending legal proceedings to which ChoiceOne or ChoiceOne Bank is a party or to which any of their properties are subject, except for proceedings that arose in the ordinary course of business. In the belief of management, pending or current legal proceedings should not have a material effect on the consolidated financial condition of ChoiceOne.

 

Item 1A.  Risk Factors.

 

Information concerning risk factors is contained in the discussion in Item 1A, “Risk Factors,” in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2020.

 

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

 

There were no unregistered sales of equity securities in the first quarter of 2021.

 

 

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ISSUER PURCHASES OF EQUITY SECURITIES

 

There were no issuer purchases of equity securities during the first quarter of 2021.

 

 

Item 5. Other Information

 

None.

 

Item 6.  Exhibits

 

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

 

Exhibit
Number

 


Document

 

 

 

2.1

 

Agreement and Plan of Merger between ChoiceOne Financial Services, Inc. and County Bank Corp dated March 22, 2019.  Previously filed as an exhibit to ChoiceOne’s Form 8-K filed March 25, 2019.  Here incorporated by reference.

 

 

 

2.2

 

Agreement and Plan of Merger between ChoiceOne Financial Services, Inc. and Community Shores Bank Corporation dated January 6, 2020.  Previously filed as an exhibit to ChoiceOne’s Form 8-K filed January 6, 2020.  Here incorporated by reference.

 

 

 

3.1

 

Restated Articles of Incorporation of ChoiceOne Financial Services, Inc. Previously filed as an exhibit to ChoiceOne’s Form 8-A filed February 4, 2020.  Here incorporated by reference.

 

 

 

3.2

 

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

 

4.1

 

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

 

 

 

31.1

 

Certification of Chief Executive Officer

 

 

 

31.2

 

Certification of Treasurer

 

 

 

32.1

 

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

 

 

 

101.INS

 

Inline XBRL Instance Document

   
101.SCH Inline XBRL Taxonomy Extension Schema Document
   
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
   
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

35

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

CHOICEONE FINANCIAL SERVICES, INC.

 

 

 

 

Date:   May 13, 2021

/s/ Kelly J. Potes

 

 

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

 

 

 

 

Date:   May 13, 2021

/s/ Thomas L. Lampen

 

 

Thomas L. Lampen
Treasurer
(Principal Financial and Accounting Officer)

 

 

 

36