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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, 2024

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, 2024, the Registrant had 7,571,112 shares of common stock outstanding.

 

 


Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

3

Item 1.

Financial Statements

3

 

Consolidated Balance Sheets

3

 

Consolidated Statements Of Income

4

 

Consolidated Statements Of Comprehensive Income (Loss)

5

 

Consolidated Statements Of Changes In Shareholders’ Equity

6

 

Consolidated Statements Of Cash Flows

7

 

Notes To Interim Consolidated Financial Statements

8

Item 2.

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

34

Item 4.

Controls and Procedures

45

PART II.

OTHER INFORMATION

46

Item 1.

Legal Proceedings

46

Item 1A.

Risk Factors

46

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

Item 5.

Other Information

46

Item 6.

Exhibits

47

Signatures

 

48

 

 


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

ChoiceOne Financial Services, Inc.
CONSOLIDATED BALANCE SHEETS (Unaudited)

 

 

March 31,

 

 

December 31,

 

(Dollars in thousands, except share data)

2024

 

 

2023

 

Assets

 

 

 

 

 

Cash and due from banks

$

149,779

 

 

$

55,083

 

Time deposits in other financial institutions

 

350

 

 

 

350

 

Cash and cash equivalents

 

150,129

 

 

 

55,433

 

 

 

 

 

 

 

Equity securities, at fair value (Note 2)

 

7,560

 

 

 

7,505

 

Securities available for sale, at fair value (Note 2)

 

504,636

 

 

 

514,598

 

Securities held to maturity, at amortized cost net of credit losses (Note 2)

 

397,981

 

 

 

407,959

 

Federal Home Loan Bank stock

 

4,449

 

 

 

4,449

 

Federal Reserve Bank stock

 

5,066

 

 

 

5,065

 

Loans held for sale

 

6,035

 

 

 

4,710

 

Loans to other financial institutions (Note 3)

 

30,032

 

 

 

19,400

 

Core loans (Note 3)

 

1,388,558

 

 

 

1,391,253

 

Total loans held for investment (Note 3)

 

1,418,590

 

 

 

1,410,653

 

Allowance for credit losses (Note 3)

 

(16,037

)

 

 

(15,685

)

Loans, net

 

1,402,553

 

 

 

1,394,968

 

 

 

 

 

 

 

Premises and equipment, net

 

28,268

 

 

 

29,750

 

Other real estate owned, net

 

122

 

 

 

122

 

Cash value of life insurance policies

 

45,079

 

 

 

45,074

 

Goodwill

 

59,946

 

 

 

59,946

 

Core deposit intangible

 

1,651

 

 

 

1,854

 

Other assets

 

57,224

 

 

 

45,273

 

Total assets

$

2,670,699

 

 

$

2,576,706

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits – noninterest-bearing

$

502,685

 

 

$

547,625

 

Deposits – interest-bearing

 

1,641,193

 

 

 

1,550,985

 

Brokered deposits

 

41,970

 

 

 

23,445

 

Total deposits

 

2,185,848

 

 

 

2,122,055

 

 

 

 

 

 

 

Borrowings

 

210,000

 

 

 

200,000

 

Subordinated debentures

 

35,568

 

 

 

35,507

 

Other liabilities

 

32,527

 

 

 

23,510

 

Total liabilities

 

2,463,943

 

 

 

2,381,072

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

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

 

-

 

 

 

-

 

Common stock and paid-in capital, no par value; shares authorized: 15,000,000; shares outstanding: 7,556,137 at March 31, 2024 and 7,548,217 at December 31, 2023

 

173,786

 

 

 

173,513

 

Retained earnings

 

77,294

 

 

 

73,699

 

Accumulated other comprehensive loss, net

 

(44,324

)

 

 

(51,578

)

Total shareholders’ equity

 

206,756

 

 

 

195,634

 

 Total liabilities and shareholders’ equity

$

2,670,699

 

 

$

2,576,706

 

 

See accompanying notes to interim consolidated financial statements.

 

3


 

ChoiceOne Financial Services, Inc.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

Three Months Ended

 

(Dollars in thousands, except share data)

March 31,

 

 

2024

 

 

2023

 

Interest income

 

 

 

 

 

Loans, including fees

$

20,786

 

 

$

14,873

 

Securities:

 

 

 

 

 

Taxable

 

5,348

 

 

 

4,913

 

Tax exempt

 

1,412

 

 

 

1,435

 

Other

 

886

 

 

 

177

 

Total interest income

 

28,432

 

 

 

21,398

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

Deposits

 

8,777

 

 

 

3,276

 

Advances from Federal Home Loan Bank

 

441

 

 

 

605

 

Other

 

2,740

 

 

 

505

 

Total interest expense

 

11,958

 

 

 

4,386

 

 

 

 

 

 

 

Net interest income

 

16,474

 

 

 

17,012

 

Provision for (reversal of) credit losses on loans

 

403

 

 

 

309

 

Provision for (reversal of) credit losses on unfunded commitments

 

(403

)

 

 

(284

)

Net Provision for (reversal of) credit losses expense

 

-

 

 

 

25

 

Net interest income after provision

 

16,474

 

 

 

16,987

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

Customer service charges

 

2,405

 

 

 

2,267

 

Insurance and investment commissions

 

198

 

 

 

196

 

Gains on sales of loans

 

454

 

 

 

403

 

Net gains (losses) on sales of securities

 

-

 

 

 

-

 

Net gains on sales and write downs of other assets

 

1

 

 

 

3

 

Earnings on life insurance policies

 

495

 

 

 

263

 

Trust income

 

213

 

 

 

184

 

Change in market value of equity securities

 

35

 

 

 

63

 

Other

 

250

 

 

 

292

 

Total noninterest income

 

4,051

 

 

 

3,671

 

 

 

 

 

 

 

Noninterest expense

 

 

 

 

 

Salaries and benefits

 

7,831

 

 

 

8,083

 

Occupancy and equipment

 

1,462

 

 

 

1,643

 

Data processing

 

1,670

 

 

 

1,682

 

Professional fees

 

615

 

 

 

621

 

Supplies and postage

 

178

 

 

 

191

 

Advertising and promotional

 

150

 

 

 

149

 

Intangible amortization

 

203

 

 

 

252

 

FDIC insurance

 

375

 

 

 

300

 

Other

 

1,200

 

 

 

1,074

 

Total noninterest expense

 

13,684

 

 

 

13,995

 

 

 

 

 

 

 

Income before income tax

 

6,841

 

 

 

6,663

 

Income tax expense

 

1,207

 

 

 

1,030

 

 

 

 

 

 

 

Net income

$

5,634

 

 

$

5,633

 

 

 

 

 

 

 

Basic earnings per share (Note 4)

$

0.75

 

 

$

0.75

 

Diluted earnings per share (Note 4)

$

0.74

 

 

$

0.75

 

Dividends declared per share

$

0.27

 

 

$

0.26

 

See accompanying notes to interim consolidated financial statements.

 

4


 

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

 

 

Three Months Ended

 

(Dollars in thousands)

March 31,

 

 

2024

 

 

2023

 

Net income

$

5,634

 

 

$

5,633

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

Change in net unrealized gain (loss) on available-for-sale securities

 

(3,170

)

 

 

13,694

 

Income tax benefit (expense)

 

666

 

 

 

(2,876

)

Less: reclassification adjustment for net (gain) loss for fair value hedge

 

5,323

 

 

 

(6,021

)

Income tax benefit (expense)

 

(1,118

)

 

 

1,264

 

Unrealized gain (loss) on available-for-sale securities, net of tax

 

1,701

 

 

 

6,061

 

 

 

 

 

 

 

Amortization of net unrealized (gains) losses on securities transferred from available-for-sale to held-to-maturity

 

56

 

 

 

29

 

Income tax benefit (expense)

 

(12

)

 

 

(6

)

Unrealized loss on held to maturity securities, net of tax

 

44

 

 

 

23

 

 

 

 

 

 

 

Change in net unrealized gain (loss) on cash flow hedge

 

6,086

 

 

 

(2,896

)

Income tax benefit (expense)

 

(1,278

)

 

 

608

 

Less: amortization of net unrealized (gains) losses included in net income

 

887

 

 

 

156

 

Income tax benefit (expense)

 

(186

)

 

 

(33

)

Unrealized gain (loss) on cash flow hedge instruments, net of tax

 

5,509

 

 

 

(2,165

)

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

7,254

 

 

 

3,919

 

 

 

 

 

 

 

Comprehensive income (loss)

$

12,888

 

 

$

9,552

 

 

See accompanying notes to interim consolidated financial statements.

 

5


 

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, 2023

 

 

7,516,098

 

 

$

172,277

 

 

$

60,348

 

 

$

(71,797

)

 

$

160,828

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

5,633

 

 

 

 

 

 

5,633

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

3,919

 

 

 

3,919

 

Shares issued

 

 

5,651

 

 

 

147

 

 

 

 

 

 

 

 

 

147

 

Effect of employee stock purchases

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

7

 

Stock-based compensation expense

 

 

 

 

 

133

 

 

 

 

 

 

 

 

 

133

 

Cash dividends declared ($0.26 per share)

 

 

 

 

 

 

 

 

(1,955

)

 

 

 

 

 

(1,955

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2023

 

 

7,521,749

 

 

$

172,564

 

 

$

64,026

 

 

$

(67,878

)

 

$

168,712

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2024

 

 

7,548,217

 

 

$

173,513

 

 

$

73,699

 

 

$

(51,578

)

 

$

195,634

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

5,634

 

 

 

 

 

 

5,634

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

7,254

 

 

 

7,254

 

Shares issued

 

 

7,040

 

 

 

90

 

 

 

 

 

 

 

 

 

90

 

Effect of employee stock purchases

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

11

 

Stock options exercised and issued (1)

 

 

880

 

 

 

 

 

 

 

 

 

 

 

 

-

 

Stock-based compensation expense

 

 

 

 

 

172

 

 

 

 

 

 

 

 

 

172

 

Cash dividends declared ($0.27 per share)

 

 

 

 

 

 

 

 

(2,039

)

 

 

 

 

 

(2,039

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2024

 

 

7,556,137

 

 

$

173,786

 

 

$

77,294

 

 

$

(44,324

)

 

$

206,756

 

 

(1) The amount shown represents the number of shares issued in net exercise transactions where shares were surrendered in payment of taxes and/or payment of all or part of the exercise price.

 

 

 

6


 

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

 

 

Three Months Ended

 

(Dollars in thousands)

March 31,

 

 

2024

 

 

2023

 

Cash flows from operating activities:

 

 

 

 

 

Net income

$

5,634

 

 

$

5,633

 

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

 

 

 

 

 

(Reversal of) provision for credit losses

 

-

 

 

 

25

 

Depreciation

 

636

 

 

 

609

 

Amortization

 

2,427

 

 

 

2,500

 

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

 

295

 

 

 

235

 

Net change in market value of equity securities

 

(35

)

 

 

(63

)

Gains on sales of loans

 

(454

)

 

 

(403

)

Loans originated for sale

 

(18,507

)

 

 

(10,283

)

Proceeds from loan sales

 

17,427

 

 

 

11,753

 

Earnings on bank-owned life insurance

 

(299

)

 

 

(263

)

Earnings on death benefit from bank-owned life insurance

 

(196

)

 

 

-

 

Deferred federal income tax (benefit)/expense

 

301

 

 

 

252

 

Net change in:

 

 

 

 

 

Other assets

 

(1,410

)

 

 

995

 

Other liabilities

 

9,495

 

 

 

(1,821

)

    Net cash provided by operating activities

 

15,314

 

 

 

9,169

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Maturities, prepayments and calls of securities available for sale

 

5,879

 

 

 

7,052

 

Maturities, prepayments and calls of securities held to maturity

 

9,531

 

 

 

2,990

 

Purchases of securities available for sale

 

(466

)

 

 

(323

)

Purchases of equity securities

 

(20

)

 

 

(70

)

Purchases of securities held to maturity

 

-

 

 

 

(421

)

Purchase of Federal Home Loan Bank stock

 

-

 

 

 

(1,678

)

Loan originations and payments, net

 

(7,986

)

 

 

(20,701

)

Proceeds from bank owned life insurance death benefits claim

 

490

 

 

 

-

 

Additions to premises and equipment

 

(311

)

 

 

(1,025

)

Proceeds from (payments for) derivative contracts, net

 

497

 

 

 

(551

)

Payments for derivative contracts settlements

 

-

 

 

 

(4,191

)

    Net cash provided by (used in) investing activities

 

7,614

 

 

 

(18,918

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net change in deposits

 

63,793

 

 

 

(12,102

)

Net change in short term borrowings

 

10,036

 

 

 

35,000

 

Issuance of common stock

 

56

 

 

 

52

 

Share based compensation withholding obligation

 

(78

)

 

 

-

 

Cash dividends

 

(2,039

)

 

 

(1,955

)

    Net cash provided by financing activities

 

71,768

 

 

 

20,995

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

94,696

 

 

 

11,246

 

Beginning cash and cash equivalents

 

55,433

 

 

 

43,943

 

 

 

 

 

 

 

Ending cash and cash equivalents

$

150,129

 

 

$

55,189

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid for interest

$

15,278

 

 

$

4,557

 

Cash paid for income taxes

 

-

 

 

 

-

 

Loans transferred to other real estate owned

 

-

 

 

 

130

 

 

See accompanying notes to interim consolidated financial statements.

 

7


 

ChoiceOne Financial Services, Inc.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

 

The consolidated financial statements include ChoiceOne Financial Services, Inc. (“ChoiceOne”), its wholly-owned subsidiaries, ChoiceOne Bank (the “Bank”) and 109 Technologies, LLC, and ChoiceOne Bank’s wholly-owned subsidiary, ChoiceOne Insurance Agencies, Inc. (the “Insurance Agency”). Intercompany transactions and balances have been eliminated in consolidation.

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

The accompanying unaudited consolidated financial statements and notes thereto reflect all adjustments ordinary in nature which are, in the opinion of management, necessary for a fair presentation of such financial statements. Operating results for the three months ended March 31, 2024, are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.

The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in ChoiceOne’s Annual Report on Form 10-K for the year ended December 31, 2023.

Use of Estimates

 

To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, ChoiceOne’s management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. These estimates and assumptions are subject to many risks and uncertainties, and actual results may differ from these estimates. Estimates associated with the allowance for credit losses and the unrealized gains and losses on securities available for sale and held to maturity are particularly susceptible to change.

Goodwill

 

Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of the acquired tangible assets and liabilities and identifiable intangible assets. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed.

Core Deposit Intangible

Core deposit intangible represents the value of the acquired customer core deposit bases and is included as an asset on the consolidated balance sheets. The core deposit intangible has an estimated finite life, is amortized on an accelerated basis over a 120 month period and is subject to periodic impairment evaluation.

Stock Transactions

A total of 3,822 shares of common stock were issued to ChoiceOne’s Board of Directors for a cash price of $112,000 under the terms of the Directors’ Stock Purchase Plan in the first quarter of 2024. A total of 2,400 shares for a cash price of $56,000 were issued under the Employee Stock Purchase Plan in the first quarter of 2024. ChoiceOne's common stock repurchase program announced in April 2021 and amended in 2022, authorizes repurchases of up to 375,388 shares, representing 5% of the total outstanding shares of common stock as of the date the program was adopted. No shares were repurchased under this program in the first quarter of 2024.


Reclassifications

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

Allowance for Credit Losses (“ACL”)

The ACL is a valuation allowance for expected credit losses. The ACL is increased by the provision for credit losses and decreased by loans charged off less any recoveries of charged off loans. As ChoiceOne has had very limited loss experience since 2011, management elected to utilize benchmark peer loss history data to estimate historical loss rates. ChoiceOne identified an appropriate peer group for

 

8


 

each loan cohort which shared similar characteristics. Management estimates the ACL required based on the selected peer group loan loss experience, the nature and volume of the loan portfolio, information about specific borrower situations and estimated collateral values, a reasonable and supportable economic forecast, and other factors. Allocations of the ACL may be made for specific loans, but the entire ACL is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the ACL when management believes that collection of a loan balance is not possible.

The ACL consists of general and specific components. The general component covers loans collectively evaluated for credit losses and is based on peer historical loss experience adjusted for current and forecasted factors. Management’s adjustment for current and forecasted factors is based on trends in delinquencies, trends in charge-offs and recoveries, trends in the volume of loans, changes in underwriting standards, trends in loan review findings, the experience and ability of lending staff, and a reasonable and supportable economic forecast described further below.

The discounted cash flow methodology is utilized for all loan pools. This methodology is supported by our CECL software provider and allows management to calculate contractual life by factoring in all cash flows and adjusting them for behavioral and credit-related aspects.

Reasonable and supportable economic forecasts have to be incorporated in determining expected credit losses. The forecast period represents the time frame from the current period end through the point in time that we can reasonably forecast and support entity and environmental factors that are expected to impact the performance of our loan portfolio. Ideally, the economic forecast period would encompass the contractual terms of all loans; however, the ability to produce a forecast that is considered reasonable and supportable becomes more difficult or may not be possible in later periods. Subsequent to the end of the forecast period, we revert to historical loan data based on an ongoing evaluation of each economic forecast in relation to then current economic conditions as well as any developing loan loss activity and resulting historical data. As of March 31, 2024, we used a one-year reasonable and supportable economic forecast period, with a two year straight-line reversion period.

We are not required to develop and use our own economic forecast model, and we elected to utilize economic forecasts from third-party providers that analyze and develop forecasts of the economy for the entire United States at least quarterly.

Other inputs to the calculation are also updated or reviewed quarterly. Prepayment speeds are updated on a one quarter lag based on the asset liability model from the previous quarter. This model is performed at the loan level. Curtailment is updated quarterly within the ACL model based on our peer group average. The reversion period is reviewed by management quarterly with consideration of the current economic climate.

We are also required to consider expected credit losses associated with loan commitments over the contractual period in which we are exposed to credit risk on the underlying commitments unless the obligation is unconditionally cancellable by us. Any allowance for off-balance sheet credit exposures is reported as an other liability on our Consolidated Balance Sheet and is increased or decreased via the provision for credit losses account on our Consolidated Statement of Income. The calculation includes consideration of the likelihood that funding will occur and forecasted credit losses on commitments expected to be funded over their estimated lives. The allowance is calculated using the same aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of commitments expected to be funded.

Loans that do not share risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation. ChoiceOne has determined that any loans which have been placed on non-performing status, loans with a risk rating of 6 or higher, and loans past due more than 60 days will be assessed individually for evaluation. Management’s judgment will be used to determine if the loan should be migrated back to pool on an individual basis. Individual analysis will establish a specific reserve for loans in scope. Specific reserves on non-performing loans are typically based on management’s best estimate of the fair value of collateral securing these loans, adjusted for selling costs as appropriate or based on the present value of the expected cash flows from that loan.

 

Securities

Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. ​ Debt securities are classified as available for sale because they might be sold before maturity. Debt securities classified as available for sale are carried at fair value, with unrealized holding gains and losses reported separately in the accumulated other comprehensive income or loss section of shareholders’ equity, net of tax effect. Restricted investments in Federal Reserve Bank stock and Federal Home Loan Bank stock are carried at cost. Equity securities consist of investments in preferred stock and investments in common stock of other financial institutions. Equity securities are reported at their fair value with changes in market value reported through current earnings.

 

9


 

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized using the level-yield method without anticipating prepayments. Gains or losses on sales are recorded on the trade date based on the amortized cost of the security sold.

Securities Available for Sale ("AFS") – For securities AFS in an unrealized loss position, management determines whether they intend to sell or if it is more likely than not that ChoiceOne will be required to sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income with an allowance being established under CECL. For securities AFS with unrealized losses not meeting these criteria, management evaluates whether any decline in fair value is due to credit loss factors. In making this assessment, management considers any changes to the rating of the security by rating agencies and adverse conditions specifically related to the issuer of the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses (“ACL”) is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Changes in the ACL under ASC 326-30 are recorded as provisions for (or reversal of) credit loss expense. Losses are charged against the allowance when the collectability of a security AFS is confirmed or when either of the criteria regarding intent or requirement to sell is met. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, net of income taxes. At March 31, 2024, there was no ACL related to securities AFS. Accrued interest receivable on securities AFS was excluded from the estimate of credit losses.

Securities Held to Maturity ("HTM") – Since the adoption of CECL, ChoiceOne measures credit losses on securities HTM on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The ACL on HTM securities is a contra asset valuation account that is deducted from the carrying amount of securities HTM to present the net amount expected to be collected. HTM securities are charged off against the ACL when deemed uncollectible. Adjustments to the ACL are reported in ChoiceOne’s Consolidated Statements of Income in the provision for credit losses. Accrued interest receivable on securities HTM is excluded from the estimate of credit losses. With regard to US Treasury securities, these have an explicit government guarantee; therefore, no ACL is recorded for these securities. With regard to obligations of states and political subdivisions and other HTM securities, management considers (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. A discounted cash flow method will be used to determine the reserve required for any credit losses on HTM securities. At March 31, 2024, the ACL related to securities HTM is insignificant.

Recent Accounting Pronouncements

 

Improvements to Income Tax Disclosure

 

ASU 2023-09 enhances transparency by requiring consistent categorization, greater disaggregation, and detailed disclosure related to income taxes paid. These changes aim to help users of financial statements understand factors contributing to differences between effective and statutory tax rates. The disclosure is effective for annual reporting periods beginning after December 15, 2024.

 

10


 

NOTE 2 – SECURITIES

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

 

 

March 31, 2024

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

(Dollars in thousands)

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Equity securities

$

7,980

 

 

$

292

 

 

$

(712

)

 

$

7,560

 

 

 

December 31, 2023

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

(Dollars in thousands)

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Equity securities

$

7,960

 

 

$

212

 

 

$

(667

)

 

$

7,505

 

 

 

The following tables present the amortized cost and fair value of securities available for sale and the gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and the amortized cost and fair value of securities held to maturity and the related gross unrealized gains and losses:

 

 

March 31, 2024

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

(Dollars in thousands)

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

Available for Sale:

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

U.S. Treasury notes and bonds

$

90,229

 

 

$

-

 

 

$

(10,953

)

 

$

79,276

 

State and municipal

 

263,439

 

 

 

-

 

 

 

(32,511

)

 

 

230,928

 

Mortgage-backed

 

207,478

 

 

 

29

 

 

 

(23,757

)

 

 

183,750

 

Corporate

 

250

 

 

 

-

 

 

 

(46

)

 

 

204

 

Asset-backed securities

 

10,729

 

 

 

-

 

 

 

(251

)

 

 

10,478

 

Total

$

572,125

 

 

$

29

 

 

$

(67,518

)

 

$

504,636

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and federal agency

$

2,974

 

 

$

-

 

 

$

(322

)

 

$

2,652

 

State and municipal

 

195,710

 

 

 

9

 

 

 

(31,086

)

 

 

164,633

 

Mortgage-backed

 

178,818

 

 

 

-

 

 

 

(24,692

)

 

 

154,126

 

Corporate

 

20,021

 

 

 

20