Company Quick10K Filing
ChoiceOne Financial Services
Price25.89 EPS2
Shares4 P/E16
MCap95 P/FCF17
Net Debt-17 EBIT10
TEV78 TEV/EBIT8
TTM 2019-09-30, in MM, except price, ratios
10-K 2020-12-31 Filed 2021-04-01
10-Q 2020-09-30 Filed 2020-11-09
10-Q 2020-06-30 Filed 2020-08-14
10-Q 2020-03-31 Filed 2020-05-11
10-K 2019-12-31 Filed 2020-03-16
10-Q 2019-09-30 Filed 2019-11-12
10-Q 2019-06-30 Filed 2019-08-09
10-Q 2019-03-31 Filed 2019-05-10
10-K 2018-12-31 Filed 2019-03-18
10-Q 2018-09-30 Filed 2018-11-14
10-Q 2018-06-30 Filed 2018-08-14
10-Q 2018-03-31 Filed 2018-05-15
10-K 2017-12-31 Filed 2018-03-29
10-Q 2017-09-30 Filed 2017-11-14
10-Q 2017-06-30 Filed 2017-08-10
10-Q 2017-03-31 Filed 2017-05-12
10-K 2016-12-31 Filed 2017-03-27
10-Q 2016-09-30 Filed 2016-11-14
10-Q 2016-06-30 Filed 2016-08-12
10-Q 2016-03-31 Filed 2016-05-13
10-K 2015-12-31 Filed 2016-03-28
10-Q 2015-09-30 Filed 2015-11-12
10-Q 2015-06-30 Filed 2015-08-12
10-Q 2015-03-31 Filed 2015-05-13
10-K 2014-12-31 Filed 2015-03-13
10-Q 2014-09-30 Filed 2014-11-12
10-Q 2014-06-30 Filed 2014-08-13
10-Q 2014-03-31 Filed 2014-05-13
10-K 2013-12-31 Filed 2014-03-31
10-Q 2013-09-30 Filed 2013-11-13
10-Q 2013-06-30 Filed 2013-08-14
10-K 2012-12-31 Filed 2013-03-29
10-Q 2012-09-30 Filed 2012-11-14
10-Q 2012-06-30 Filed 2012-08-14
10-Q 2012-03-31 Filed 2012-05-14
10-K 2011-12-31 Filed 2012-03-28
10-Q 2011-09-30 Filed 2011-11-14
10-Q 2011-06-30 Filed 2011-08-12
10-Q 2011-03-31 Filed 2011-05-16
10-K 2010-12-31 Filed 2011-03-28
10-Q 2010-09-30 Filed 2010-11-15
10-Q 2010-06-30 Filed 2010-08-16
10-Q 2010-03-31 Filed 2010-05-17
10-K 2009-12-31 Filed 2010-03-30
8-K 2021-01-29 Earnings
8-K 2020-12-16 Amend Bylaw, Exhibits
8-K 2020-10-28
8-K 2020-07-01
8-K 2020-06-30
8-K 2020-06-17
8-K 2020-05-29
8-K 2020-05-14
8-K 2020-04-27
8-K 2020-02-06
8-K 2020-02-04
8-K 2020-01-03
8-K 2019-10-25
8-K 2019-10-01
8-K 2019-09-18
8-K 2019-09-16
8-K 2019-08-28
8-K 2019-07-24
8-K 2019-07-02
8-K 2019-05-22
8-K 2019-05-20
8-K 2019-04-24
8-K 2019-03-22
8-K 2019-03-22
8-K 2019-03-04
8-K 2019-01-28
8-K 2019-01-23
8-K 2018-10-24
8-K 2018-10-24
8-K 2018-07-25
8-K 2018-06-27
8-K 2018-05-23
8-K 2018-05-21
8-K 2018-04-25
8-K 2018-01-24
8-K 2018-01-24

COFS 10K Annual Report

Note 1 – Summary of Significant Accounting Policies
Note 2 – Securities
Note 3 – Loans and Allowance for Loan Losses
Note 4 – Mortgage Banking
Note 5 – Premises and Equipment
Note 6 - Goodwill and Acquired Intangible Assets
Note 7 – Other Real Estate Owned
Note 8 – Deposits
Note 9 – Borrowings
Note 10 – Subordinated Debentures
Note 11 – Income Taxes
Note 12 – Related Party Transactions
Note 13 – Employee Benefit Plans
Note 14 - Stock Based Compensation
Note 15 - Earnings per Share
Note 16 – Condensed Financial Statements of Parent Company
Note 17 – Financial Instruments
Note 18 – Fair Value Measurements
Note 19 – Off - Balance Sheet Activities
Note 20 – Regulatory Capital
Note 21 – Business Combination
Note 22 – Quarterly Financial Data (Unaudited)
EX-21 ex_222074.htm
EX-23 ex_237861.htm
EX-24 ex_237862.htm
EX-31.1 ex_222073.htm
EX-31.2 ex_222072.htm
EX-32 ex_222071.htm

ChoiceOne Financial Services Earnings 2020-12-31

Balance SheetIncome StatementCash Flow
67554040527013502012201420172020
Assets, Equity
2.11.71.30.80.40.02016201720182020
Rev, G Profit, Net Income
20112-7-16-252012201420172020
Ops, Inv, Fin

cofs20201002_10k.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

 

FORM 10-K

 

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

  
 

For the fiscal year ended December 31, 2020

  

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 Street, Sparta, Michigan
(Address of Principal Executive Offices)

49345
(Zip Code)

 

(616) 887-7366
(Registrant's Telephone Number, Including Area Code)

 

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

 

 

Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934: None.

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐   No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐   No ☒

 

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, smaller reporting company, or an emerging growth company. See 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

 

Emerging growth company

Smaller reporting 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

 

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

 

As of June 30, 2020, the aggregate market value of common stock held by non-affiliates of the Registrant was $198.2 million. This amount is based on an average bid price of $29.56 per share for the Registrant's stock as of such date.

 

As of February 28, 2021, the Registrant had 7,801,084 shares of common stock outstanding.

  

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the definitive Proxy Statement of ChoiceOne Financial Services, Inc. for the Annual Meeting of Shareholders to be held on May 27, 2021 are incorporated by reference into Part III of this Form 10-K.

 

1

 

 

ChoiceOne Financial Services, Inc.

Form 10-K ANNUAL REPORT

 

Contents

 

 

   

Page

PART 1 

   

Item 1: 

Business

4

Item 1A: 

Risk Factors

13

Item 1B: 

Unresolved Staff Comments 

17

Item 2: 

Properties

17

Item 3: 

Legal Proceedings

17

Item 4: 

Mine Safety Disclosures

17

     

PART II

   

Item 5: 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

18

Item 6: 

Selected Financial Data 

19

Item 7: 

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

20

Item 7A:

Quantitative and Qualitative Disclosures About Market Risk

33

Item 8: 

Financial Statements and Supplementary Data

35

Item 9: 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

73

Item 9A: 

Controls and Procedures

73

Item 9B: 

Other Information

73

     

PART III

   

Item 10: 

Directors, Executive Officers and Corporate Governance

74

Item 11: 

Executive Compensation

74

Item 12: 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

74

Item 13: 

Certain Relationships and Related Transactions, and Director Independence

75

Item 14: 

Principal Accountant Fees and Services

75

     

PART IV

   

Item 15: 

Exhibits and Financial Statement Schedules

75

     

SIGNATURES

 

77

 


 

 

2

 

 

FORWARD-LOOKING STATEMENTS

 

This report and the documents incorporated into this 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 Financial Services, Inc. Words such as “anticipates,” “believes,” “expects,” “forecasts,” “intends,” “is likely,” “plans,” “predicts,” “projects,” “may,” “could,” “estimates,” “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 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.   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 Financial Services, Inc. undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.

 

Risk factors include, but are not limited to, the risk factors disclosed in Item 1A of this report. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.

 

 

PART I

 

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 the year ended December 31, 2020 include the impact of the merger, which was effective as of July 1, 2020. 

 

On October 1, 2019, ChoiceOne completed the merger of County Bank Corp. ("County") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2019 and December 31, 2020 include the impact of the merger, which was effective as of October 1, 2019.

 

For additional details regarding the mergers with Community Shores and County, see Note 21 (Business Combination) of the Notes to the Consolidated Financial Statements included in Item 8 of this report.

 

3

 

Item 1.

Business

 

General

ChoiceOne is a financial holding company registered under the Bank Holding Company Act of 1956, as amended (“BHC Act”). The Company was incorporated on February 24, 1986, as a Michigan corporation. The Company was formed to create a bank holding company for the purpose of acquiring all of the capital stock of ChoiceOne Bank, which became a wholly owned subsidiary of the Company on April 6, 1987. Effective November 1, 2006, the Company merged with Valley Ridge Financial Corp., a one-bank holding company for Valley Ridge Bank (“VRB”). In December 2006, VRB was consolidated into ChoiceOne Bank. Effective October 1, 2019, County, a one-bank holding company for Lakestone Bank & Trust (“Lakestone”), merged with and into the Company.  Lakestone was consolidated into ChoiceOne Bank in May 2020.  On July 1, 2020, Community Shores Bank Corporation ("Community Shores"), a one bank holding company for Community Shores Bank, merged with and into the Company.   Community Shores Bank was consolidated into ChoiceOne Bank in October 2020. ChoiceOne Bank owns all of the outstanding common stock of ChoiceOne Insurance Agencies, Inc., an independent insurance agency headquartered in Sparta, Michigan (the "Insurance Agency"), and all of the outstanding capital stock of Lakestone Financial Services, Inc. (“Lakestone Financial”) and Community Shores Financial Services, Inc. (“Community Shores Financial”).

 

The Company's business is primarily concentrated in a single industry segment, banking. ChoiceOne Bank (referred to as the “Bank”) is a full-service banking institution that offers a variety of deposit, payment, credit and other financial services to all types of customers. These services include time, savings, and demand deposits, safe deposit services, and automated transaction machine services. Loans, both commercial and consumer, are extended primarily on a secured basis to corporations, partnerships and individuals. Commercial lending covers such categories as business, industry, agricultural, construction, inventory and real estate. The Bank’s consumer loan departments make direct and indirect loans to consumers and purchasers of residential and real property. In addition, the Bank offers trust and wealth management services. No material part of the business of the Company or the Bank is dependent upon a single customer or very few customers, the loss of which would have a materially adverse effect on the Company.

 

The Bank’s primary market areas lie within Kent, Muskegon, Newaygo, and Ottawa counties in western Michigan, and Lapeer, Macomb, and St. Clair counties in southeastern Michigan in the communities where the Bank's respective offices are located. The Bank serves these markets through 32 full-service offices. The Company and the Bank have no foreign assets or income.

 

At December 31, 2020, the Company had consolidated total assets of $1.9 billion, net loans of $1.1 billion, total deposits of $1.7 billion and total shareholders' equity of $227.3 million. For the year ended December 31, 2020, the Company recognized consolidated net income of $15.6 million. The principal source of revenue for the Company and the Bank is interest and fees on loans. On a consolidated basis, interest and fees on loans accounted for 60%, 64%, and 64% of total revenues in 2020, 2019, and 2018, respectively. Interest on securities accounted for 11%, 13%, and 14% of total revenues in 2020, 2019, and 2018, respectively. For more information about the Company's financial condition and results of operations, see the consolidated financial statements and related notes included in Item 8 of this report.

 

The information under the heading “The Coronavirus (COVID-19) Outbreak” on page 23 is incorporated herein by reference.

 

Competition

The Bank’s competition primarily comes from other financial institutions located within Kent, Muskegon, Newaygo, and Ottawa counties in western Michigan and Lapeer, Macomb, and St. Clair counties in southeastern Michigan. There are a number of larger commercial banks within the Bank’s primary market areas. The Bank also competes with a large number of other financial institutions, such as savings and loan associations, insurance companies, consumer finance companies, credit unions, internet banks and other financial technology companies, and commercial finance and leasing companies for deposits, loans and service business. Money market mutual funds, brokerage houses and nonfinancial institutions provide many of the financial services offered by the Bank. Many of these competitors have substantially greater resources than the Bank. The principal methods of competition for financial services are price (the rates of interest charged for loans, the rates of interest paid for deposits and the fees charged for services) and the convenience and quality of services rendered to customers.

 

4

 

Supervision and Regulation

Banks and bank holding companies are extensively regulated. The Company is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Company's activities are generally limited to owning or controlling banks and engaging in such other activities as the Federal Reserve Board may determine to be closely related to banking. Prior approval of the Federal Reserve Board, and in some cases various other government agencies, is required for the Company to acquire control of any additional bank holding companies, banks or other operating subsidiaries. Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support it.

 

The Bank is chartered under state law and is subject to regulation by the Michigan Department of Insurance and Financial Services (“DIFS”). State banking laws place restrictions on various aspects of banking, including permitted activities, loan interest rates, branching, payment of dividends and capital and surplus requirements. The Bank is a member of the Federal Reserve System and is also subject to regulation by the Federal Reserve Board. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) to the maximum extent provided by law. The Bank is a member of the Federal Home Loan Bank system, which provides certain advantages to the Bank, including favorable borrowing rates for certain funds.

 

The Company is a legal entity separate and distinct from the Bank. The Company's primary source of funds available to pay dividends to shareholders is dividends paid to it by the Bank. There are legal limitations on the extent to which the Bank can lend or otherwise supply funds to the Company. In addition, payment of dividends to the Company by the Bank is subject to various state and federal regulatory limitations.

 

The FDIC formed the Deposit Insurance Fund (“DIF”) in accordance with the Federal Deposit Insurance Reform Act of 2005 (“Reform Act”) to create a stronger and more stable insurance system. The FDIC maintains the insurance reserves of the DIF by assessing depository institutions an insurance premium. The DIF insures deposit accounts of the Bank up to a maximum amount of $250,000 per separately insured depositor. FDIC insured depository institutions are required to pay deposit insurance premiums based on the risk an institution poses to the DIF. In February 2011, the FDIC finalized rules, effective for assessments occurring after April 1, 2011, which redefined an institution's assessment base as average consolidated total assets minus average Tier 1 capital. The new rules also established the initial base assessment rate for Risk Category 1 institutions, such as the Bank, at 5 to 9 basis points (annualized). Effective July 1, 2016, the FDIC amended its rules to eliminate Risk Categories for small banks, replacing them with a method based on a bank’s CAMELS composite rating and several financial ratios. On that date, the Bank’s initial base assessment rate was reduced to 3 basis points, since the Federal Deposit Insurance Reserve Ratio reached 1.15% as of June 30, 2016.

 

The Deposit Insurance Funds Act of 1996 authorized the Financing Corporation (“FICO”) to impose periodic assessments on all depository institutions. The purpose of these periodic assessments is to spread the cost of the interest payments on the outstanding FICO bonds issued to recapitalize the Savings Association Insurance Fund (“SAIF”) over a larger number of institutions.

 

The federal banking agencies have adopted guidelines to promote the safety and soundness of federally-insured depository institutions. These guidelines establish standards for, among other things, internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.

 

The Company and the Bank are subject to regulatory “risk-based” capital guidelines. Failure to meet these capital guidelines could subject the Company or the Bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and other restrictions on its business. In addition, the Bank would generally not receive regulatory approval of any application that requires the consideration of capital adequacy, such as a branch or merger application, unless it could demonstrate a reasonable plan to meet the capital requirement within a reasonable period of time.

 

Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank. In addition, if DIFS deems the Bank's capital to be impaired, DIFS may require the Bank to restore its capital by a special assessment on the Company as the Bank's sole shareholder. If the Company fails to pay any assessment, the Company’s directors will be required, under Michigan law, to sell the shares of the Bank's stock owned by the Company to the highest bidder at either a public or private auction and use the proceeds of the sale to restore the Bank's capital.

 

5

 

The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) requires, among other things, federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. FDICIA sets forth the following five capital categories: “well-capitalized,” “adequately-capitalized,” “undercapitalized,” “significantly-undercapitalized” and “critically-undercapitalized.” A depository institution's capital category will depend upon how its capital levels compare with various relevant capital measures as established by regulation, which include Tier 1 and total risk-based capital ratio measures and a leverage capital ratio measure. Under certain circumstances, the appropriate banking agency may treat a well-capitalized, adequately-capitalized, or undercapitalized institution as if the institution were in the next lower capital category.

 

Federal banking regulators are required to take specified mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Subject to a narrow exception, the banking regulator must generally appoint a receiver or conservator for an institution that is critically undercapitalized. An institution in any of the undercapitalized categories is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. An undercapitalized institution is also generally prohibited from paying any dividends, increasing its average total assets, making acquisitions, establishing any branches, accepting or renewing any brokered deposits or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval.

 

On July 3, 2013, the FDIC Board of Directors approved the Regulatory Capital Interim Final Rule, implementing Basel III. This rule redefines Tier 1 capital as two components (Common Equity Tier 1 and Additional Tier 1), creates a new capital ratio (Common Equity Tier 1 Risk-based Capital Ratio) and implements a capital conservation buffer. It also revises the prompt corrective action thresholds and makes changes to risk weights for certain assets and off-balance-sheet exposures. The Bank was required to transition into the new rule beginning on January 1, 2015.

 

Banks are subject to a number of federal and state laws and regulations, which have a material impact on their business. These include, among others, minimum capital requirements, state usury laws, state laws relating to fiduciaries, the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act, the Expedited Funds Availability Act, the Community Reinvestment Act, the Real Estate Settlement Procedures Act, the Service Members Civil Relief Act, the USA PATRIOT Act, the Bank Secrecy Act, regulations of the Office of Foreign Assets Controls, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, electronic funds transfer laws, redlining laws, predatory lending laws, antitrust laws, environmental laws, money laundering laws and privacy laws. The monetary policy of the Federal Reserve Board may influence the growth and distribution of bank loans, investments and deposits, and may also affect interest rates on loans and deposits. These policies may have a significant effect on the operating results of banks.

 

In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities that the Federal Reserve Board has determined to be closely related to the business of banking. In addition, bank holding companies that qualify and elect to be financial holding companies may engage in any activities that are financial in nature or complementary to a financial activity and do not pose a substantial risk to the safety and soundness of depository institutions or the financial system without prior approval of the Federal Reserve Board. Activities that are financial in nature include securities underwriting and dealing, insurance underwriting and making merchant banking investments.  The Company has elected to be a financial holding company.

 

In order for the Company to maintain financial holding company status, both the Company and the Bank must be categorized as "well-capitalized" and "well-managed" under applicable regulatory guidelines. If the Company or the Bank ceases to meet these requirements, the Federal Reserve Board may impose corrective capital and/or managerial requirements and place limitations on the Company’s ability to conduct the broader financial activities permissible for financial holding companies. In addition, if the deficiencies persist, the Federal Reserve Board may require the Company to divest of the Bank. The Company and the Bank were each categorized as "well-capitalized" and "well-managed" as of December 31, 2020.

 

Bank holding companies may acquire banks and other bank holding companies located in any state in the United States without regard to geographic restrictions or reciprocity requirements imposed by state banking law. Banks may also establish interstate branch networks through acquisitions of and mergers with other banks. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed only if specifically authorized by state law.

 

6

 

Michigan banking laws do not significantly restrict interstate banking. The Michigan Banking Code permits, in appropriate circumstances and with the approval of DIFS, (1) acquisition of Michigan banks by FDIC-insured banks, savings banks or savings and loan associations located in other states, (2) sale by a Michigan bank of branches to an FDIC-insured bank, savings bank or savings and loan association located in a state in which a Michigan bank could purchase branches of the purchasing entity, (3) consolidation of Michigan banks and FDIC-insured banks, savings banks or savings and loan associations located in other states having laws permitting such consolidation, (4) establishment of branches in Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction, and (5) establishment by foreign banks of branches located in Michigan.

 

Banks are subject to the provisions of the Community Reinvestment Act ("CRA"). Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with its examination of a bank, to assess the bank's record in meeting the credit needs of the community served by that bank, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of the institution. Under the CRA, institutions are assigned a rating of "outstanding," "satisfactory," "needs to improve," or "substantial non-compliance." The regulatory agency's assessment of the bank's record is made available to the public. Further, a bank's federal regulatory agency is required to assess the CRA compliance record of any bank that has applied to establish a new branch office that will accept deposits, relocate an office, or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or another bank holding company, the Federal Reserve Board will assess the CRA compliance record of each subsidiary bank of the applicant bank holding company, and such compliance records may be the basis for denying the application. Upon receiving notice that a subsidiary bank is rated less than "satisfactory," a financial holding company will be prohibited from additional activities that are permitted to be conducted by a financial holding company and from acquiring any company engaged in such activities. The CRA rating of the Bank was "Satisfactory" as of its most recent examination.

 

Effects of Compliance With Environmental Regulations

The nature of the business of the Bank is such that it holds title, on a temporary or permanent basis, to a number of parcels of real property. These include properties owned for branch offices and other business purposes as well as properties taken in or in lieu of foreclosure to satisfy loans in default. Under current state and federal laws, present and past owners of real property may be exposed to liability for the cost of cleanup of environmental contamination on or originating from those properties, even if they are wholly innocent of the actions that caused the contamination. These liabilities can be material and can exceed the value of the contaminated property. Management is not presently aware of any instances where compliance with these provisions will have a material effect on the capital expenditures, earnings or competitive position of the Company or the Bank, or where compliance with these provisions will adversely affect a borrower's ability to comply with the terms of loan contracts.

 

Employees

As of February 28, 2021, the Company, on a consolidated basis, employed 359 employees, of which 305 were full-time employees.  Our employees are not represented by any collective bargaining group. Management considers its employee relations to be good. 

 

Statistical Information

Additional statistical information describing the business of the Company appears on the following pages and in Management's Discussion and Analysis of Financial Condition and Results of Operations and in Item 7 of this report and in the Consolidated Financial Statements and the notes thereto in Item 8 of this report. The following statistical information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and notes in this report.

 

Securities Portfolio 

The carrying value of securities categorized by type as of December 31 was as follows:

 

(Dollars in thousands)

 

2020

   

2019

   

2018

 
                         

Equity securities

  $ 2,896     $ 2,851     $ 2,847  
                         

U.S. Government and federal agency

  $ 2,051     $ 17,215     $ 33,529  

U.S. Treasury notes and bonds

    2,056       2,008       1,947  

State and municipal

    320,368       173,924       103,928  

Mortgage-backed securities

    246,723       142,760       21,575  

Corporate

    2,589       2,672       5,102  

Trust preferred securities

    1,000       1,000       500  

Asset-backed securities

    -       -       21  

Total

  $ 574,787     $ 339,579     $ 166,602  

 

7

 

The Company did not hold investment securities from any one issuer at December 31, 2020, that were greater than 10% of the Company's shareholders' equity, exclusive of U.S. Government and U.S. Government agency securities.

 

Presented below is the fair value of securities as of December 31, 2020 and 2019, a schedule of maturities of securities as of December 31, 2020, and the weighted average yields of securities as of December 31, 2020:

 

   

Securities maturing within:

                 
                                   

Fair Value

   

Fair Value

 
   

Less than

   

1 Year -

   

5 Years -

   

More than

   

at Dec. 31,

   

at Dec. 31,

 

(Dollars in thousands)

 

1 Year

   

5 Years

   

10 Years

   

10 Years

   

2020

   

2019

 
                                                 

U.S. Government and federal agency

  $ -     $ 2,051     $ -     $ -     $ 2,051     $ 17,215  

U.S. Treasury notes and bonds

    -       2,056       -       -       2,056       2,008  

State and municipal (1)

    15,636       55,752       230,775       18,205       320,368       173,924  

Corporate

    589       959       1,041       -       2,589       2,672  

Trust preferred securities

    -       -       -       1,000       1,000       1,000  

Total debt securities

    16,225       60,818       231,816       19,205       328,064       196,819  
                                                 

Mortgage-backed securities

    3,497       81,853       154,879       6,494       246,723       142,760  

Equity securities (2)

    -       1,000       -       1,896       2,896       2,851  

Total

  $ 19,722     $ 143,671     $ 386,695     $ 27,595     $ 577,683     $ 342,430  

 

   

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

%

    -

%

    -

%

    1.98

%

U.S. Treasury notes and bonds

    -       1.85       -       -       1.85  

State and municipal (1)

    2.19       3.20       2.97       2.91       2.97  

Corporate

    4.70       2.63       2.86       -       3.59  

Trust preferred securities

    -       -       -       3.75       3.75  

Mortgage-backed securities

    4.84       1.61       0.98       1.55       1.26  
Equity securities (2)     -       4.61       -       -       1.59  

 

(1) The yield is computed for tax-exempt securities on a fully tax-equivalent basis at an incremental tax rate of 21% for 2020.

(2) Equity securities are preferred and common stock that may or may not have a stated maturity.

 

8

 

Loan Portfolio

The Company's loan portfolio categorized by loan type (excluding loans held for sale and loans to other financial institutions) is presented below for the respective years ended December 31:

 

(Dollars in thousands)

                                       
   

2020

   

2019

   

2018

   

2017

   

2016

 

Agricultural

  $ 53,735     $ 57,339     $ 49,109     $ 48,464     $ 44,614  
Commercial and industrial     303,527       148,083       91,406       104,386       96,088  
Consumer     34,014       38,854       24,382       24,513       21,596  
Real estate - commercial     469,247       326,379       139,453       123,487       110,762  
Real estate - construction     16,639       13,411       8,843       6,613       6,153  
Real estate - residential     192,506       217,982       95,880       91,322       89,787  

Total loans, gross

  $ 1,069,668     $ 802,048     $ 409,073     $ 398,785     $ 369,000  

 

Maturities and Sensitivities of Loans to Changes in Interest Rates

The following schedule presents the maturities of loans (excluding residential real estate and consumer loans) as of December 31, 2020. All loans over one year in maturity (excluding residential real estate and consumer loans) are also presented classified according to the sensitivity to changes in interest rates as of December 31, 2020.

 

(Dollars in thousands)

 

Less than

   

1 Year -

   

More than

         
   

1 Year

   

5 Years

   

5 Years

   

Total

 

Loan Type

                               

Agricultural

  $ 13,645     $ 15,782     $ 24,308     $ 53,735  

Commercial and industrial

    50,176       200,944       52,407       303,527  

Real estate - commercial

    34,655       245,063       189,529       469,247  

Real estate - construction

    16,391       248       -       16,639  

Totals

  $ 114,867     $ 462,037     $ 266,244     $ 843,148  

 

(Dollars in thousands)

 

Less than

   

1 Year -

   

More than

         
   

1 Year

   

5 Years

   

5 Years

   

Total

 

Loan Sensitivity to Changes in Interest Rates

                               

Loans with fixed interest rates

  $ 37,066     $ 420,019     $ 184,418     $ 641,503  

Loans with floating or adjustable interest rates

    77,801       42,018       81,826       201,645  

Totals

  $ 114,867     $ 462,037     $ 266,244     $ 843,148  

 

Loan maturities are classified according to the contractual maturity date or the anticipated amortization period, whichever is appropriate. The anticipated amortization period is used in the case of loans where a balloon payment is due before the end of the loan’s normal amortization period. At the time the balloon payment is due, the loan can either be rewritten or payment in full can be requested. The decision regarding whether the loan will be rewritten or a payment in full will be requested will be based upon the loan’s payment history, the borrower’s current financial condition, and other relevant factors.

 

Risk Elements

The following loans were classified as nonperforming as of December 31:

 

(Dollars in thousands)

                                       
   

2020

   

2019

   

2018

   

2017

   

2016

 

Loans accounted for on a nonaccrual basis

    6,707     $ 4,687     $ 1,532     $ 1,096     $ 1,983  

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

    -       -       -       258       229  

Loans defined as "troubled debt restructurings"

    1,537       1,726       2,254       2,896       2,853  

Totals

  $ 8,244     $ 6,413     $ 3,786     $ 4,250     $ 5,065  

 

A loan is placed on nonaccrual status at the point in time at which the collectability of principal or interest is considered doubtful.

 

9

 

The table below illustrates interest forgone and interest recorded on nonperforming loans for the years presented:

 

(Dollars in thousands)

                       
   

2020

   

2019

   

2018

 

Interest on non-performing loans that would have been earned had the loans been in an accrual or performing status

  $ 845     $ 474     $ 224  

Interest on non-performing loans that was actually recorded when received

  $ 224     $ 104     $ 122  

 

Potential Problem Loans

At December 31, 2020, there were no loans not disclosed above where known information about possible credit problems of borrowers caused management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms. Specific loss allocations totaling $283,000 from the allowance for loan losses had been allocated for all nonperforming and potential problem loans as of December 31, 2020. However, the entire allowance for loan losses is also available for any potential problem loans.

 

Loan Concentrations

As of December 31, 2020, there was no concentration of loans exceeding 10% of total loans that is not otherwise disclosed as a category of loans pursuant to Item III.A. of Industry Guide 3.

 

Other Interest-Bearing Assets

As of December 31, 2020, there were no other interest-bearing assets requiring disclosure under Item III.C.1. or 2. of Industry Guide 3 if such assets were loans.

 

Summary of Loan Loss Experience

The following schedule presents a summary of activity in the allowance for loan losses for the periods shown and the percentage of net charge-offs during each period to average gross loans outstanding during the period:

 

(Dollars in thousands)

 

2020

   

2019

   

2018

   

2017

   

2016

 
                                         

Allowance for loan losses at beginning of year

  $ 4,057     $ 4,673     $ 4,577     $ 4,277     $ 4,194  
                                         

Charge-offs:

                                       
Agricultural     15       -       -       -       -  
Commercial and industrial     148       83       58       439       37  
Consumer     329       589       282       253       218  
Real estate - commercial     254       -       -       -       -  
Real estate - construction     -       25       -       -       -  
Real estate - residential     8       292       25       43       102  
Total charge-offs     754       989       365       735       357  
                                         

Recoveries:

                                       
Agricultural     -       65       33       -       -  
Commercial and industrial     57       22       107       21       31  
Consumer     204       26       112       169       149  
Real estate - commercial     10       -       61       258       89  
Real estate - construction     -       124       -       40       -  
Real estate - residential     19       136       113       62       171  
Total recoveries     290       373       426       550       440  
                                         
Net charge-offs (recoveries)     464       616       (61 )     185       (83 )
                                         
Provision for loan losses     4,000       -       35       485       -  
                                         

Allowance for loan losses at end of year

  $ 7,593     $ 4,057     $ 4,673     $ 4,577     $ 4,277  
                                         

Allowance for loan losses as a percentage of:

                                       

Total loans as of year end

    0.71

%

    0.51

%

    1.14

%

    1.15

%

    1.16

%

Nonaccrual loans, accrual loans past due 90 days or more and troubled debt restructurings

    92

%

    63

%

    123

%

    108

%

    84

%

Ratio of net charge-offs during the period to average loans outstanding during the period

    0.05

%

    0.12

%

    (0.02

)%

    0.05

%

    (0.02

)%

Loan recoveries as a percentage of prior year's charge-offs

    29

%

    102

%

    58

%

    154

%

    95

%

 

 

Additions to the allowance for loan losses charged to operations during the periods shown were based on management’s judgment after considering factors such as loan loss experience, evaluation of the loan portfolio, and prevailing and anticipated economic conditions. The evaluation of the loan portfolio is based upon various risk factors such as the financial condition of the borrower, the value of collateral and other considerations, which, in the opinion of management, deserve current recognition in estimating loan losses.

 

10

 

The following schedule presents an allocation of the allowance for loan losses to the various loan categories as of the years ended December 31:

 

(Dollars in thousands)

 

2020

   

2019

   

2018

   

2017

   

2016

 

Agricultural

  $ 257     $ 471     $ 481     $ 506     $ 433  
Commercial and industrial     1,327       655       892       1,001       688  
Consumer     317       270       254       262       305  
Real estate - commercial     4,178       1,663       1,926       1,761