UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, 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 September 30, 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: 001-39209
ChoiceOne Financial Services, Inc.
(Exact Name of Registrant as Specified in its Charter)
Michigan(State or Other Jurisdiction ofIncorporation or Organization)
38-2659066(I.R.S. Employer Identification No.)
109 East DivisionSparta, 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).
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 October 31, 2024, the Registrant had 8,957,627 shares of common stock outstanding.
Table of Contents
Page
PART I.
FINANCIAL INFORMATION
3
Item 1.
Financial Statements
Consolidated Balance Sheets
Consolidated Statements Of Income
4
Consolidated Statements Of Comprehensive Income (Loss)
6
Consolidated Statements Of Changes In Shareholders’ Equity
7
Consolidated Statements Of Cash Flows
10
Notes To Interim Consolidated Financial Statements
11
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
41
Item 4.
Controls and Procedures
55
PART II.
OTHER INFORMATION
56
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 5.
Other Information
Item 6.
Exhibits
57
Signatures
58
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
ChoiceOne Financial Services, Inc.CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30,
December 31,
(Dollars in thousands, except share data)
2024
2023
Assets
Cash and due from banks
$
145,588
55,083
Time deposits in other financial institutions
350
Cash and cash equivalents
145,938
55,433
Equity securities, at fair value (Note 2)
7,816
7,505
Securities available for sale, at fair value (Note 2)
497,552
514,598
Securities held to maturity, at amortized cost net of credit losses (Note 2)
391,954
407,959
Federal Home Loan Bank stock
4,449
Federal Reserve Bank stock
5,307
5,065
Loans held for sale
5,994
4,710
Loans to other financial institutions (Note 3)
38,492
19,400
Core loans (Note 3)
1,465,458
1,391,253
Total loans held for investment (Note 3)
1,503,950
1,410,653
Allowance for credit losses (Note 3)
(16,490
)
(15,685
Loans, net
1,487,460
1,394,968
Premises and equipment, net
27,135
29,750
Other real estate owned, net
529
122
Cash value of life insurance policies
45,699
45,074
Goodwill
59,946
Core deposit intangible
1,250
1,854
Other assets
44,974
45,273
Total assets
2,726,003
2,576,706
Liabilities
Deposits – noninterest-bearing
521,055
547,625
Deposits – interest-bearing
1,680,546
1,550,985
Brokered deposits
6,627
23,445
Total deposits
2,208,228
2,122,055
Borrowings
210,000
200,000
Subordinated debentures
35,691
35,507
Other liabilities
24,338
23,510
Total liabilities
2,478,257
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: 8,959,664 at September 30, 2024 and 7,548,217 at December 31, 2023
206,427
173,513
Retained earnings
86,765
73,699
Accumulated other comprehensive loss, net
(45,446
(51,578
Total shareholders’ equity
247,746
195,634
Total liabilities and shareholders’ equity
See accompanying notes to interim consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended
Nine Months Ended
Interest income
Loans, including fees
23,252
17,774
66,009
48,625
Securities:
Taxable
5,563
5,346
16,382
15,637
Tax exempt
1,402
1,420
4,224
4,244
Other
1,473
1,764
3,451
2,512
Total interest income
31,690
26,304
90,066
71,018
Interest expense
Deposits
8,362
7,237
25,464
15,569
Advances from Federal Home Loan Bank
468
272
1,372
1,498
2,612
2,569
8,137
4,622
Total interest expense
11,442
10,078
34,973
21,689
Net interest income
20,248
16,226
55,093
49,329
Provision for (reversal of) credit losses on loans
425
438
1,100
332
Provision for (reversal of) credit losses on unfunded commitments
(438
(675
(557
Net Provision for (reversal of) credit losses expense
(225
Net interest income after provision
19,823
54,668
49,554
Noninterest income
Customer service charges
2,773
2,382
7,840
6,920
Insurance and investment commissions
184
173
572
541
Gains on sales of loans
631
536
1,610
1,479
Net gains (losses) on sales of securities
(71
Net gains on sales and write downs of other assets
191
13
203
149
Earnings on life insurance policies
315
278
1,115
810
Trust income
232
197
665
577
Change in market value of equity securities
277
(134
241
(456
264
330
755
911
Total noninterest income
4,867
3,704
13,001
10,860
Noninterest expense
Salaries and benefits
8,372
8,038
24,467
23,958
Occupancy and equipment
1,475
1,427
4,414
4,577
Data processing
1,932
1,724
5,382
5,087
Professional fees
610
435
1,818
1,675
Supplies and postage
174
192
520
580
Advertising and promotional
168
269
517
573
Intangible amortization
198
247
604
752
FDIC insurance
390
270
1,155
790
Merger related expenses
645
—
1,453
1,126
3,857
3,304
Total noninterest expense
15,417
13,728
43,379
41,296
Income before income tax
9,273
6,202
24,290
19,118
Income tax expense
1,925
1,080
4,722
3,150
Net income
7,348
5,122
19,568
15,968
Basic earnings per share (Note 4)
0.86
0.68
2.48
2.12
Diluted earnings per share (Note 4)
0.85
2.46
Dividends declared per share
0.27
0.26
0.81
0.78
5
ChoiceOne Financial Services, Inc.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(Dollars in thousands)
Other comprehensive income:
Change in net unrealized gain (loss) on available-for-sale securities
14,077
(21,739
11,091
(13,063
Income tax benefit (expense)
(2,956
4,565
(2,329
2,743
Less: reclassification adjustment for net (gain) loss included in net income
Less: reclassification adjustment for net (gain) loss for fair value hedge
(9,827
9,189
(2,841
9,920
2,064
(1,930
597
(2,083
Less: net unrealized (gains) losses on securities transferred from available-for-sale to held-to-maturity
Unrealized gain (loss) on available-for-sale securities, net of tax
3,358
(9,915
6,518
(2,483
Reclassification of unrealized gain (loss) upon transfer of securities from available-for-sale to held-to-maturity
Amortization of net unrealized (gains) losses on securities transferred from available-for-sale to held-to-maturity
61
67
261
(12
(14
(36
(55
Unrealized loss on held to maturity securities, net of tax
49
53
137
206
Change in net unrealized gain (loss) on cash flow hedge
(9,558
9,625
(1,753
12,748
2,006
(2,021
367
(2,677
Less: reclassification adjustment for net (gain) loss on cash flow hedge
Less: amortization of net unrealized (gains) losses included in net income
(0
897
1,092
1,940
(188
(229
(407
Unrealized gain (loss) on cash flow hedge instruments, net of tax
(7,552
8,313
(523
11,604
Other comprehensive income (loss), net of tax
(4,145
(1,549
6,132
9,327
Comprehensive income (loss)
3,203
3,573
25,700
25,295
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
For the nine months ended September 30,
Accumulated
Common
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
Other comprehensive income (loss)
Shares issued
25,089
428
Effect of employee stock purchases
23
Stock-based compensation expense
459
Cash dividends declared ($0.78 per share)
(5,872
Balance, September 30, 2023
7,541,187
173,187
70,444
(62,470
181,161
Balance, January 1, 2024
7,548,217
30,435
280
33
Stock options exercised and issued (1)
1,012
508
Common stock offering
1,380,000
32,093
Cash dividends declared ($0.81 per share)
(6,502
Balance, September 30, 2024
8,959,664
(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.
8
For the three months ended September 30,
Balance, July 1, 2023
7,534,658
172,880
67,281
(60,921
179,240
6,529
131
9
167
Cash dividends declared ($0.26 per share)
(1,959
Balance, July 1, 2024
7,573,618
173,984
81,836
(41,301
214,519
5,914
165
132
Cash dividends declared ($0.27 per share)
(2,419
ChoiceOne Financial Services, Inc.CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash from operating activities:
(Reversal of) provision for credit losses
Depreciation
1,907
Amortization
7,263
7,495
Compensation expense on employee stock purchase plan, stock options, and restricted stock units
741
Net losses (gains) on sales of available for sale securities
71
Net change in market value of equity securities
(241
456
(1,610
(1,479
Loans originated for sale
(48,171
(37,845
Proceeds from loan sales
47,810
38,330
Earnings on bank-owned life insurance
(919
(810
Earnings on death benefit from bank-owned life insurance
(196
(Gains)/losses on sales of other real estate owned
(17
Proceeds from sales of other real estate owned
139
144
Deferred federal income tax (benefit)/expense
166
138
Net change in:
(3,534
4,443
1,507
28,049
Net cash provided by operating activities
24,638
57,330
Cash flows from investing activities:
Sales of equity securities
887
Maturities, prepayments and calls of securities available for sale
25,109
21,981
Maturities, prepayments and calls of securities held to maturity
16,710
10,218
Purchases of securities available for sale
(1,116
(110
Purchases of equity securities
(70
Purchases of securities held to maturity
(2,000
(597
Purchase of Federal Home Loan Bank stock
(242
(4,849
Proceeds from redemption of Federal Home Loan Bank stock
3,916
Loan originations and payments, net
(94,121
(120,271
Proceeds from bank owned life insurance death benefits claim
490
Additions to premises and equipment
(1,047
(3,454
Payments for derivative contracts settlements
(4,191
Proceeds from (payments for) derivative contracts, net
382
Net cash provided by (used in) investing activities
(56,287
(96,088
Cash flows from financing activities:
Net change in deposits
86,173
15,192
Net change in short term borrowings
10,109
130,000
Issuance of common stock
500
Share based compensation withholding obligation
(220
Cash dividends
Cash related to common stock offering
32,094
Net cash provided by financing activities
122,154
139,488
Net change in cash and cash equivalents
90,505
100,730
Beginning cash and cash equivalents
43,943
Ending cash and cash equivalents
144,673
Supplemental disclosures of cash flow information:
Cash paid for interest
34,358
18,393
Cash paid for income taxes
4,450
3,900
Loans transferred to other real estate owned
266
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 nine months ended September 30, 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.
Recent Events
On July 26, 2024, ChoiceOne completed an underwritten public offering of 1,380,000 shares of its common stock at a price to the public of $25.00 per share (the “Common Stock Offering”). The aggregate gross proceeds of the Common Stock Offering were approximately $34.5 million before deducting underwriting discounts and estimated offering expenses. The proceeds from the Common Stock Offering will qualify as tangible common equity and Tier 1 common equity. ChoiceOne intends to use the net proceeds of the Common Stock Offering for general corporate purposes including supplementing regulatory capital ratios and in conjunction with its announced merger with Fentura Financial, Inc.
On July 25, 2024, ChoiceOne and Fentura Financial, Inc. (“Fentura”), the parent company of The State Bank, announced the signing of a definitive merger agreement pursuant to which ChoiceOne and Fentura will merge in an all-stock transaction. The agreement was unanimously approved by the boards of directors of both companies. Under the terms of the merger agreement, each share of Fentura common stock outstanding immediately prior to completion of the merger will be converted into the right to receive 1.35 shares of ChoiceOne common stock. Once completed, the combination will create the third largest publicly traded bank in Michigan with approximately $4.3 billion in consolidated total assets and 56 offices in Western, Central and Southeastern Michigan. The proposed transaction is expected to close in the first quarter of 2025, subject to the satisfaction of customary closing conditions, including receipt of approval from Fentura and ChoiceOne shareholders and receipt of all necessary regulatory approvals.
Merger-related expenses
During the three and nine months ended September 30, 2024, the Company incurred merger-related expenses totaling $645,000. These expenses primarily consist of professional fees, including legal, accounting, advisory fees associated with the merger, and regulatory filing fees. These expenses are included in the Consolidated Statements of Income under Noninterest Expense. Merger related expenses are presented net of tax in the Non-GAAP reconciliation of Adjusted Net Income in the Management Discussion & Analysis.
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 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 3,877 and 11,582 shares of common stock were issued to ChoiceOne’s Board of Directors for a cash price of $111,000 and $330,000 under the terms of the Directors’ Stock Purchase Plan in the third quarter and first nine months of 2024, respectively. A total of 2,037 and 6,943 shares for a cash price of $53,000 and $170,000 were issued under the Employee Stock Purchase Plan in the third quarter and first nine months of 2024, respectively. 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 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 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 September 30, 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.
12
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.
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 September 30, 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 September 30, 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.
Reportable Segment Disclosures
In 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-07, which introduces improvements to reportable segment disclosures under Topic 280. This update aims to enhance the transparency and usefulness of segment information for financial statement users. The key changes include requiring public entities to disclose significant segment expenses and segment profit or loss measures that are regularly reviewed by management. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.
14
NOTE 2 – SECURITIES
The fair value of equity securities and the related gross unrealized gains and (losses) recognized in noninterest income were as follows:
September 30, 2024
Gross
Amortized
Unrealized
Fair
Cost
Gains
Losses
Value
Equity securities
8,030
(546
December 31, 2023
7,960
212
(667
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:
Available for Sale:
U.S. Treasury notes and bonds
89,994
(7,762
82,232
State and municipal
269,780
(34,746
235,034
Mortgage-backed
189,408
59
(18,708
170,759
Corporate
250
(37
213
Asset-backed securities
9,511
(197
9,314
558,943
(61,450
Held to Maturity:
U.S. Government and federal agency
2,977
2,757
196,165
(25,013
171,162
172,476
(18,644
153,832
20,036
32
(2,212
17,856
300
(7
293
42
(46,096
345,900
15
90,345
(10,151
80,194
269,918
(35,236
234,682
212,392
(23,905
188,501
(46
204
11,334
(317
11,017
584,239
(69,655
2,972
(293
2,679
196,098
(30,220
165,892
188,329
(25,796
162,533
20,013
21
(2,864
17,170
547
(30
35
(59,203
348,791
Available for sale securities with unrealized losses as of September 30, 2024 and December 31, 2023, aggregated by investment category and length of time the individual securities have been in an unrealized loss position, were as follows:
Less than 12 months
More than 12 months
7,762
34,746
158,840
18,708
37
Total temporarily impaired
485,633
61,450
10,151
557
234,125
35,230
35,236
1,255
176,400
23,882
177,655
23,905
46
317
1,812
29
501,940
69,626
503,752
69,655
16
Held to maturity securities with unrealized losses as of September 30, 2024 and December 31, 2023, aggregated by investment category and length of time the individual securities have been in an unrealized loss position, were as follows:
220
6,818
162,111
24,001
168,929
25,013
18,644
16,177
2,212
335,170
45,084
341,988
46,096
165,526
30,220
165,549
25,796
15,509
2,864
30
346,764
59,203
346,787
17
ChoiceOne evaluates all securities on a quarterly basis to determine if an ACL and corresponding impairment charge should be recorded. Consideration is given to the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of ChoiceOne to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value of amortized cost basis. ChoiceOne believes that unrealized losses on securities were temporary in nature and were caused primarily by changes in interest rates, increased credit spreads, and reduced market liquidity and were not caused by the credit status of the issuer. No ACL was recorded in the three and nine months ended September 30, 2024 and 2023.
At September 30, 2024 and December 31, 2023, there were 541 and 569 securities with an unrealized loss, respectively. Unrealized losses have not been recognized into income because the issuers’ bonds are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.
The majority of unrealized losses at September 30, 2024, are related to U.S. Treasury notes and bonds, state and municipal bonds and mortgage backed securities. The U.S. Treasury notes are guaranteed by the U.S. government and 100% of the notes are rated AA or better. State and municipal bonds are backed by the taxing authority of the bond issuer or the revenues from the bond. On September 30, 2024, 86% of state and municipal bonds held are rated AA or better, 10% are A rated and 4% are not rated. Of the mortgage-backed securities held on September 30, 2024, 42% were issued by US government sponsored entities and agencies, and rated AA, 43% are AAA rated private issue and collateralized mortgage obligation, and 15% are unrated privately issued mortgage-backed securities with structured credit enhancement and collateralized mortgage obligation.
18
Presented below is a schedule of maturities of securities as of September 30, 2024. Available for sale securities are reported at fair value and held to maturity securities are reported at amortized cost. Callable securities in the money are presumed called and matured at the callable date.
Available for Sale Securities maturing within:
Fair Value
Less than
1 Year -
5 Years -
More than
at September 30,
1 Year
5 Years
10 Years
1,018
22,377
113,176
98,463
6,793
2,521
Total debt securities
111,402
115,910
326,793
Mortgage-backed securities
8,693
65,274
83,639
13,153
Total Available for Sale
9,711
176,676
199,549
111,616
Held to Maturity Securities maturing within:
Amortized Cost
19,729
98,326
75,138
3,272
22,706
118,362
219,478
13,248
37,077
122,151
Total Held to Maturity
16,520
59,783
240,513
Following is information regarding unrealized gains and losses on equity securities for the three and nine months ended September 30, 2024 and 2023:
Net gains and (losses) recognized during the period
(205
(527
Less: Net gains and (losses) recognized during the period on securities sold
Unrealized gains and (losses) recognized during the reporting period on securities still held at the reporting date
19
NOTE 3 – LOANS AND ALLOWANCE FOR CREDIT LOSSES
Loans by type as a percentage of the portfolio were as follows:
Balance
%
Percent Increase (Decrease)
Agricultural
49,147
3.3
49,210
3.5
(0.1
Commercial and Industrial
229,232
15.2
229,915
16.3
(0.3
Commercial Real Estate
862,773
57.4
786,921
55.8
9.6
Consumer
30,693
2.0
36,541
2.6
(16.0
Construction Real Estate
14,555
1.0
20,936
1.5
(30.5
Residential Real Estate
279,058
18.6
267,730
19.0
4.2
Loans to Other Financial Institutions
1.4
98.4
Gross Loans
Allowance for credit losses
16,490
1.10
15,685
1.11
Net loans
20
Activity in the allowance for credit losses and balances in the loan portfolio were as follows:
Commercial
Loans to Other
And
Construction
Residential
Financial
Industrial
Real Estate
Institutions
Allowance for Credit Losses Three Months Ended September 30, 2024
Beginning balance
112
2,161
795
9,360
3,625
50
16,152
Charge-offs
(166
(23
(189
Recoveries
2
96
102
Provision
(2
307
36
(140
(13
227
Ending balance
110
2,470
761
9,220
3,833
60
Allowance for Credit Losses Nine Months Ended September 30, 2024
94
2,216
823
8,820
3,644
(1
(616
(640
321
345
242
233
400
(22
201
Individually evaluated for credit loss
1
1.00
78
88
Collectively evaluated for credit loss
109
2,463
760
9,219
3,755
16,402
Loans
26
27
229
2,266
2,735
49,134
229,058
30,667
862,746
14,326
276,792
1,501,215
and
Allowance for Credit Losses
Individually evaluated for impairment
51
Collectively evaluated for impairment
92
2,210
8,819
3,593
15,625
54
136
1,858
2,079
49,156
229,779
36,539
786,892
265,872
1,408,574
Acquired with deteriorated credit quality
Financial Institution
Unallocated
Allowance for Credit Losses Three Months Ended September 30, 2023
2,896
885
70
3,376
40
14,582
(73
(161
(27
(261
28
80
113
(328
22
908
(19
(150
83
2,523
826
8,145
3,204
14,872
Allowance for Credit Losses Nine Months Ended September 30, 2023
1,361
310
4,822
63
906
7,619
Cumulative effect of change in accounting principle
1,587
3,006
2,010
7,165
(432
(532
208
288
(75
(409
199
304
(32
305
89
347
45
484
2,434
7,798
3,159
14,388
The provision for credit losses on loans was an expense of $425,000 in the third quarter of 2024, compared to an expense of $438,000 in the same period in the prior year. The provision expense was deemed necessary due to loan growth during the third quarter and changes in the forecast used in estimating the reserve.
The process to monitor the credit quality of ChoiceOne’s loan portfolio includes tracking (1) the risk ratings of business loans and (2) 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.
The following table reflects the amortized cost basis of loans as of September 30, 2024 based on year of origination (dollars in thousands):
Commercial:
2022
2021
2020
Prior
Term Loans Total
Revolving Loans
Grand Total
Pass
6,290
1,794
3,359
2,924
1,573
19,181
35,121
13,844
48,965
Special mention
182
Substandard
Doubtful
Loss
19,363
35,303
Current year-to-date gross write-offs (1)
33,953
20,139
33,374
17,065
7,948
11,816
124,295
104,519
228,814
93
226
406
416
33,467
17,125
7,975
12,044
124,703
104,529
107,946
140,667
112,938
101,041
68,276
162,743
693,611
168,808
862,419
354
163,097
693,965
Total Commercial Loans
148,189
162,600
149,764
121,090
77,824
194,504
853,971
287,181
1,141,152
24
Retail:
Performing
5,439
7,354
9,107
1,848
30,043
648
30,691
Nonperforming
Nonaccrual
9,109
30,045
31
Construction real estate
986
530
1,516
12,810
13,039
Residential real estate
30,342
46,667
57,249
26,151
14,684
46,458
221,551
55,383
276,934
1,142
551
2,089
2,124
46,871
58,391
26,702
46,650
223,640
55,418
Total Retail Loans
74,273
55,211
67,500
32,054
16,532
48,123
293,693
69,105
362,798
(1) It is noted that write-offs in the tables above do not include checking account write-offs. Checking account write-offs during the first nine months of 2024 were $473,000 or an annualized $631,000 compared to $480,000 during the full year 2023 and $377,000 or an annualized $503,000 during the first nine months of 2023.
25
The following table reflects the amortized cost basis of loans as of December 31, 2023 based on year of origination (dollars in thousands):
2019
5,015
4,088
3,078
1,788
7,028
18,476
39,473
9,507
48,980
176
230
7,204
18,530
39,703
23,600
45,489
23,462
10,502
9,214
11,882
124,149
105,559
229,708
73
64
200
23,490
10,537
9,287
11,950
124,353
105,562
158
149,181
134,289
107,033
71,754
43,846
136,361
642,464
143,120
785,584
1,337
137,698
643,801
Total Business Loans
177,796
183,866
133,601
84,079
60,337
168,178
807,857
258,189
1,066,046
9,775
13,876
6,771
2,849
1,260
1,202
35,733
808
72
2,507
2,719
552
5,778
15,158
54,231
64,768
28,301
16,391
12,556
40,270
216,517
49,491
266,008
380
486
1,692
1,722
65,148
29,127
40,756
218,209
49,521
Total Consumer Loans
85,913
81,743
36,450
19,240
13,816
41,958
279,120
65,487
344,607
The following tables present the amortized cost basis of the loans modified to borrowers experiencing financial difficulty disaggregated by class of financing receivable and type of concession granted during the first nine months of 2024 and the full year 2023.
For the period ended:
Term Extension
% of Total
Class of
Financing
Cost Basis
Receivable
121
0
Commercial and industrial
129
189
The following table presents the financial effect by type of modification made to borrowers experiencing financial difficulty and class of financing receivable during the first nine months of 2024 and the full year 2023.
Provided with new five year payment plan based on bankruptcy
Termed out line of credit & termed out draw note
Provided with new twelve month payment plan to catch up on past due balance.
The following table presents the period-end amortized cost basis of financing receivables that had a payment default during the period and were modified in the 12 months before default to borrowers experiencing financial difficulty.
Term extension
The following table presents the period-end amortized cost basis of loans that have been modified in the past 12 months to borrowers experiencing financial difficulty by payment status and class of financing receivable.
Current
30-89 days
Greater than 90 days
162
Nonaccrual loans by loan category were as follows:
As of September 30, 2024
Nonaccrual loans with no ACL
Total nonaccrual loans
Interest income recognized year to date on nonaccrual loans
361
1,763
590
1,765
38
As of September 30, 2023
103
457
1,567
1,670
As of December 31, 2023
707
1,723
An aging analysis of loans by loan category follows:
Past Due
90 Days
Greater
Past
30 to 59
60 to 89
Than 90
Loans Not
Due and
Days (1)
Total (1)
Accruing
43
229,189
30,686
Commercial real estate
862,544
76
14,479
249
1,104
1,240
2,593
276,465
306
1,171
1,471
2,948
1,501,002
229,914
36,508
786,748
549
870
2,174
265,556
959
871
2,381
1,408,272
(1) Includes nonaccrual loans.
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:
Basic
Weighted average common shares outstanding
8,567,548
7,537,996
7,898,938
7,528,887
Basic earnings per common shares
Diluted
Plus dilutive stock options and restricted stock units
47,952
30,038
45,205
33,273
Weighted average common shares outstanding and potentially dilutive shares
8,615,500
7,568,034
7,944,143
7,562,160
Diluted earnings per common share
There were no stock options that were considered anti-dilutive to earnings per share for the three months ended September 30, 2024 and 3,000 stock options that were considered anti-dilutive to earnings per share for the nine months ended September 30, 2024. There were 15,000 stock options that were considered anti-dilutive to earnings per share for the three and nine months ended September 30, 2023.
Note 5 – Financial Instruments
Financial instruments as of the dates indicated were as follows:
Quoted Prices
In Active
Significant
Markets for
Identical
Observable
Unobservable
Carrying
Estimated
Inputs
Amount
(Level 1)
(Level 2)
(Level 3)
Equity securities at fair value
4,919
2,897
Securities available for sale
415,320
Securities held to maturity
331,677
14,223
Federal Home Loan Bank and Federal
Reserve Bank stock
9,756
6,174
1,472,115
Accrued interest receivable
11,400
Interest rate lock commitments
Interest rate derivative contracts
6,410
Loan swaps
1,331
Noninterest-bearing deposits
Interest-bearing deposits
1,680,622
6,646
210,349
32,881
Accrued interest payable
6,838
2,004
4,749
2,756
434,404
335,493
13,298
9,514
4,851
1,362,920
10,066
8,880
1,549,386
23,435
199,743
31,748
6,223
NOTE 6 – FAIR VALUE MEASUREMENTS
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis at September 30, 2024 and December 31, 2023, and the valuation techniques used by the Company to determine those fair values.
In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.
In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.
Disclosures concerning assets and liabilities measured at fair value are as follows:
Assets and Liabilities Measured at Fair Value on a Recurring Basis
at Date
Indicated
Equity Securities Held at Fair Value - September 30, 2024
Investment Securities, Available for Sale - September 30, 2024
Derivative Instruments - September 30, 2024
Interest rate derivative contracts - assets
Interest rate derivative contracts - liabilities
Loan Swaps - September 30, 2024
Loan swaps - assets
Loan swaps - liabilities
Equity Securities Held at Fair Value - December 31, 2023
Investment Securities, Available for Sale - December 31, 2023
U. S. Treasury notes and bonds
Derivative Instruments - December 31, 2023
Securities classified as available for sale are generally reported at fair value utilizing Level 2 inputs. ChoiceOne’s external investment advisor obtained fair value measurements from an independent pricing service that uses matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). The fair value measurements considered observable data that may include dealer quotes, market spreads, cash flows and the bonds' terms and conditions, among other things. Securities classified in Level 2 included U.S. Government and federal agency securities, state and municipal securities, mortgage-backed securities, corporate bonds, and asset backed securities. The Company classified certain state and municipal securities and corporate bonds, and equity securities as Level 3. Based on the lack of observable market data, estimated fair values were based on the observable data available and reasonable unobservable market data.
34
Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis
Equity Securities Held at Fair Value
Balance, January 1
2,542
Total realized and unrealized gains included in noninterest income
Net purchases, sales, calls, and maturities
Net transfers into Level 3
Balance, September 30,
Amount of total losses for the period included in earning attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at September 30,
Of the Level 3 assets that were held by the Company at September 30, 2024, the net unrealized gain as of September 30, 2024 was $283,000, compared to $208,000 as of September 30, 2023. The change in the net unrealized gain or loss is recognized in noninterest income or other comprehensive income in the consolidated balance sheets and income statements. Amounts recognized in noninterest income relate to changes in equity securities. A total of $70,000 and $110,000 of Level 3 securities were purchased during the nine months ended 2024 and 2023, respectively.
Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 assets and liabilities. As a result, the unrealized gains and losses for these assets and liabilities presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs.
The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets are not normally measured at fair value, but can be subject to fair value adjustments in certain circumstances, such as impairment. Disclosures concerning assets measured at fair value on a non-recurring basis are as follows:
Assets Measured at Fair Value on a Non-recurring Basis
Balances at
Dates
Collateral Dependent Loans
387
Other Real Estate
Collateral dependent loans classified as Level 3 are loans for which the repayment is expected to be provided substantially through the sale or operation of the collateral when the borrower is experiencing financial difficulty. The fair value of the collateral should be adjusted for estimated costs to sell if the repayment depends on the sale of the collateral. The net carrying amount of the loan should not exceed the fair value of the collateral (less costs to sell, if applicable).
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:
Service charges and fees on deposit accounts
1,230
1,176
3,482
3,307
Interchange income
1,543
1,206
4,358
3,613
Investment commission income
Trust fee income
Other charges and fees for customer services
409
476
Noninterest income from contracts with customerswithin the scope of ASC 606
3,351
2,936
9,486
8,514
Noninterest income within the scope of other GAAP topics
768
3,515
2,346
NOTE 8 – DERIVATIVE AND HEDGING ACTIVITIES
ChoiceOne is exposed to certain risks relating to its ongoing business operations. ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. Derivative instruments represent contracts between parties that result in one party delivering cash to the other party based on a notional amount and an underlying term (such as a rate, security price or price index) as specified in the contract. The amount of cash delivered from one party to the other is determined based on the interaction of the notional amount of the contract with the underlying term. Derivatives are also implicit in certain contracts and commitments.
ChoiceOne recognizes derivative financial instruments in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. ChoiceOne records derivative assets and derivative liabilities on the balance sheet within other assets and other liabilities, respectively. Changes in the fair value of derivative financial instruments are either recognized in income or in shareholders’ equity as a component of accumulated other comprehensive income or loss depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value hedge or cash flow hedge.
Interest rate swaps
ChoiceOne uses interest rate swaps as part of its interest rate risk management strategy to add stability to net interest income and to manage its exposure to interest rate movements. Interest rate swaps designated as hedges involve the receipt of variable-rate amounts from a counterparty in exchange for ChoiceOne making fixed-rate payments or the receipt of fixed-rate amounts from a counterparty in exchange for ChoiceOne making variable rate payments, over the life of the agreements without the exchange of the underlying notional amount.
In the second quarter of 2022, ChoiceOne entered into two pay-floating/receive-fixed interest rate swaps (the “Pay Floating Swap Agreements”) for a total notional amount of $200.0 million that were designated as cash flow hedges. These derivatives hedge the variable cash flows of specifically identified available-for-sale securities, cash and loans. The Pay Floating Swap Agreements were determined to be highly effective during the periods presented and therefore no amount of ineffectiveness has been included in net income. The Pay Floating Swap Agreements pay a coupon rate equal to SOFR while receiving a fixed coupon rate of 2.41%. In March 2023, ChoiceOne terminated all Pay Floating Swap Agreements for a cash payment of $4.2 million. The loss was amortized into interest income over 13 months, which was the remaining period of the swap agreements. As of April 2024, the loss was fully amortized.
In the second quarter of 2022, ChoiceOne entered into one forward starting pay-fixed/receive-floating interest rate swap (the “Pay Fixed Swap Agreement”) for a notional amount of $200.0 million that was designated as a cash flow hedge. This derivative hedges the risk of variability in cash flows attributable to forecasted payments on future deposits or floating rate borrowings indexed to the SOFR Rate. The Pay Fixed Swap Agreement is two years forward starting with an eight-year term set to expire in 2032. The Pay Fixed Swap Agreement will pay a fixed coupon rate of 2.75% while receiving the SOFR Rate, which began in April 2024. Net settlements on the Pay Fixed Swap Agreement were $1.3 million and $2.3 million for the three and nine months ended September 30, 2024, which reduced interest expense.
In the fourth quarter of 2022, ChoiceOne entered into four pay-fixed/receive-floating interest rate swaps for a total notional amount of $201.0 million that were designated as fair value hedges. These derivatives hedge the risk of changes in fair value of certain available for sale securities for changes in the SOFR benchmark interest rate component of the fixed rate bonds. All four of these hedges were effective immediately on December 22, 2022. Of the total notional value, $101.9 million has a ten-year term set to expire in 2032, with the benchmark SOFR interest rate risk component of the fixed rate bonds equal to 3.390%. Of the total notional value, $50.0 million has a nine-year term set to expire in 2031, with the benchmark SOFR interest rate risk component of the fixed rate bonds equal to 3.4015%. The remaining notional value of $49.1 million has a nine-year term set to expire in 2031, with the benchmark SOFR interest rate risk component of the fixed rate bond equal to 3.4030%. ChoiceOne adopted ASC2022-01, as of December 20, 2022, to use the portfolio layer method. The fair value basis adjustment associated with available-for-sale fixed rate bonds initially results in an adjustment to AOCI. For available-for-sale securities subject to fair value hedge accounting, the changes in the fair value of the fixed rate bonds related to the hedged risk (the benchmark interest rate component and the partial term) are then reclassed from AOCI to current earnings offsetting the fair value measurement change of the interest rate swap, which is also recorded in current earnings. Net cash settlements are received/paid semi-annually, with the first starting in March 2023, and are included in interest income.
Net settlements on these four pay-fixed/receive-floating swaps were $1.0 million and $959,000 for the three months ended September 30, 2024 and 2023, respectively, and $3.0 million and $2.3 million for the nine months ended September 30, 2024 and 2023, respectively, which were included in interest income.
The table below presents the fair value of derivative financial instruments as well as the classification within the consolidated statements of financial condition:
Balance Sheet Location
Derivatives designated as hedging instruments
Interest rate contracts
Other Assets
Other Liabilities
The table below presents the effect of fair value and cash flow hedge accounting on the consolidated statements of operations for the periods presented:
Location and Amount of Gain or (Loss)
Recognized in Income on Fair Value and Cash Flow Hedging Relationships
Three months ended September 30, 2024
Three months ended September 30, 2023
Nine months ended September 30, 2024
Nine months ended September 30, 2023
Interest Income
Interest Expense
Total amounts of income and expense line items presented in the consolidated statements of income in which the effects of fair value or cash flow hedges are recorded
1,180
1,327
2,038
2,301
(534
Gain or (loss) on fair value hedging relationships:
Interest rate contracts:
Hedged items
9,827
(9,189
2,841
(9,920
(9,665
9,097
(2,720
9,842
Amount excluded from effectiveness testing recognized in earnings based on amortization approach
Gain or (loss) on cash flow hedging relationships:
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income
(897
(1,092
(1,940
The table below presents the cumulative basis adjustments on hedged items designated as fair value hedges and the related amortized cost of those items as of the periods presented:
Cumulative amount of Fair
Value Hedging Adjustment
Line Item in the Statement of
included in the carrying
Financial Position in which the
Amortized cost of the
amount of the Hedged
Hedged Item is included
Hedged Assets/(Liabilities)
Assets/(Liabilities)
220,706
2,444
Back to Back Loan Swaps
Derivatives not designated as hedges are not speculative and result from a service provided to certain commercial loan borrowers. ChoiceOne executes interest rate swaps with commercial banking customers desiring longer-term fixed rate loans, while simultaneously entering into interest rate swaps with a correspondent bank to offset the impact of the interest rate swaps with the commercial banking customers. This is known as a back to back loan swap agreement. The net result is the desired floating rate loan and a minimization of the risk exposure of the interest rate swap transactions. Under this arrangement the Bank has three freestanding interest rate swaps, each of which is carried at fair value. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the commercial banking customer interest rate swaps and the offsetting interest rate swaps with the correspondent bank are recognized directly to earnings. As the terms mirror each other, there is no income statement impact to the Bank.
The table below presents the notional and fair value of these derivative instruments as of September 30, 2024 and December 31, 2023:
Notional Amount
Derivative assets
42,647
Derivative liabilities
The fair value of interest rate swaps in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements was $1.3 million and $0 as of September 30, 2024 and December 31, 2023, respectively. ChoiceOne has a master netting agreement with the correspondent bank and has the right to offset, however, ChoiceOne has elected to present the assets and liabilities gross. ChoiceOne is required to pledge collateral to the correspondent bank equal to or in excess of the net liability position. ChoiceOne's derivative liability with the correspondent bank was $1.3 million and $0 at September 30, 2024 and December 31, 2023, respectively. Cash pledged as collateral to the correspondent bank was $1.4 million and $0 at September 30, 2024 and December 31, 2023, respectively.
Interest rate swaps entered into with commercial loan customers had notional amounts aggregating $42.6 million as of September 30, 2024 and $0 at December 31, 2023. Associated credit exposure is generally mitigated by securing the interest rate swaps with the underlying collateral of the loan instrument that has been hedged.
39
NOTE 9 – Borrowings
Federal Home Loan Bank Advances
Maturity of July 2025 with fixed interest rate of 4.88%
20,000
Maturity of January 2026 with fixed interest rate of 4.35%
10,000
Maturity of December 2026 with fixed interest rate of 4.20%
Total advances outstanding at period end
40,000
30,000
Bank Term Funding Program (“BTFP”)
Maturity of May 2024 with fixed interest rate of 4.71%
160,000
Maturity of December 2024 with fixed interest rate of 4.83%
Maturity of January 2025 with fixed interest rate of 4.76%
170,000
Total BTFP outstanding at period end
Advances from the FHLB were secured by residential real estate loans with a carrying value of approximately $201.0 million at September 30, 2024, compared to residential real estate loans with a carrying value of approximately $191.1 million and securities with a carrying value of approximately $278.5 million at December 31, 2023. Based on this collateral, the Bank was eligible to borrow an additional $89.8 million at September 30, 2024.
Advances from the Federal Reserve Bank were secured by securities with a carrying value of approximately $515.7 million and loans with a carrying value of approximately $467.6 million at September 30, 2024, compared to securities with a carrying value of approximately $526.4 million and loans with a carrying value of approximately $433.2 million at December 31, 2023. Based on this collateral, the Bank was eligible to borrow an additional $689.5 million at September 30, 2024.
In June 2021, ChoiceOne obtained a $20 million line of credit with an annual renewal. The line carries a floating rate of prime rate with a floor of 3.25% and current rate of 8.0% at September 30, 2024. The credit agreement includes certain financial covenants, including minimum capital ratios, asset quality ratios, and the requirements of achieving certain profitability thresholds.
ChoiceOne was in compliance with all covenants as of September 30, 2024. The line of credit balance was $0 at September 30, 2024.
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”) and its wholly-owned subsidiaries. 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,” “will” 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 credit 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 post-retirement benefit plans involve judgments that are inherently forward-looking. 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. Such risks, uncertainties and assumptions, include, among others, the following:
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, 2023 and in Part II, Item 1A of ChoiceOne’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2024. These are representative of the risk factors that could cause a difference between an ultimate actual outcome and a preceding forward-looking statement.
RECENT EVENTS
On July 25, 2024, ChoiceOne and Fentura Financial, Inc. (“Fentura”), the parent company of The State Bank, announced the signing of a definitive merger agreement (the “Merger Agreement”) pursuant to which ChoiceOne and Fentura will merge in an all-stock transaction. The agreement was unanimously approved by the boards of directors of both companies. Under the terms of the merger
agreement, each share of Fentura common stock outstanding immediately prior to completion of the merger will be converted into the right to receive 1.35 shares of ChoiceOne common stock. Once completed, the combination will create the third largest publicly traded bank in Michigan with approximately $4.3 billion in consolidated total assets and 56 offices in Western, Central and Southeastern Michigan. The proposed transaction is expected to close in the first quarter of 2025, subject to the satisfaction of customary closing conditions, including receipt of approval from Fentura and ChoiceOne shareholders and receipt of all necessary regulatory approvals.
RESULTS OF OPERATIONS
ChoiceOne reported net income of $7,348,000 and $19,568,000 for the three and nine months ended September 30, 2024, compared to $5,122,000 and $15,968,000 for the same periods in 2023, representing growth of 43.5% and 22.5%, respectively. Net income adjusted for merger related expenses net of tax was $7,981,000 and $20,201,000 for the three and nine months ended September 30, 2024. Diluted earnings per share were $0.85 and $2.46 in the three and nine months ended September 30, 2024, compared to $0.68 and $2.12 per share in the same periods in the prior year. Earnings per share was negatively impacted by the sale of 1,380,000 shares of common stock in the Common Stock Offering.
(In Thousands, Except Per Share Data)
Merger related expenses net of tax
633
Adjusted net income (Non-GAAP)
7,981
20,201
Weighted average number of shares
Diluted average shares outstanding
Adjusted basic earnings per share (Non-GAAP)
0.94
2.56
Adjusted diluted earnings per share (Non-GAAP)
0.93
2.54
As of September 30, 2024, total assets were $2.7 billion, an increase of $149.3 million compared to December 31, 2023. The growth is primarily attributed to an increase in core loans of $74.2 million and loans to other financial institutions of $19.1 million and an increase in cash and due from banks of $90.5 million compared to December 31, 2023. This growth was partially offset by a $33.1 million reduction in securities during the same time period. ChoiceOne has actively managed its balance sheet to support organic loan growth, strategically shifting from lower-yielding assets to higher-yielding loans. This is reflected in the loan growth observed during the nine months ended September 30, 2024.
Deposits, excluding brokered deposits, increased $102.1 million or an annualized 19.5% in the third quarter of 2024 and $103.0 million or 4.9% compared to December 31, 2023. The increase in deposits in the third quarter was driven by public funds including schools and townships which historically increase in the third quarter of each year due to the timing of tax collection. The increase in deposits compared to December 31, 2023 is a combination of new business and recapture of deposit losses from the prior year. ChoiceOne continues to be proactive in managing its liquidity position by using brokered deposits, the Bank Term Funding Program (“BTFP”), and FHLB advances to ensure ample liquidity. At September 30, 2024, total available borrowing capacity secured by pledged assets was $780.6 million. ChoiceOne can increase its capacity by utilizing unsecured federal fund lines and pledging additional assets, if necessary. Uninsured deposits totaled $863.3 million or 39.1% of deposits at September 30, 2024.
ChoiceOne's cost of deposits to average total deposits has declined since peaking in the first quarter of 2024 due to positive cash flow from pay-fixed interest rate swaps, hedged against deposits, decreasing deposit expenses. In addition, the Federal Reserve decreased the federal funds rate by 50 basis points in September 2024 and signaled potential further rate drops in the future. The cost of deposits to average total deposits has increased slightly to an annualized 1.53% in the third quarter of 2024 compared to an annualized 1.36% in the third quarter of 2023. Due to hedge instruments we have in place, our balance sheet is asset sensitive. If rates decline, we expect to see slight declines in deposit costs; however these declines will be muted by the decrease in cash flows from pay-fixed interest rate swaps collected. Interest expense on borrowings for the three and nine months ended September 30, 2024 increased $239,000 and $3.4 million, respectively, compared to the same periods in the prior year, due to increases in borrowing amounts and interest rates. Borrowings include $170 million from the BTFP and $40 million of FHLB borrowings at a weighted average fixed rate of 4.7%, with the earliest maturity in January 2025. Total cost of funds increased to an annualized 1.87% in the third quarter of 2024 compared to an annualized 1.70% in the third quarter of 2023.
The annualized return on average assets and annualized return on average shareholders’ equity were 1.09% and 12.36%, respectively, for the third quarter of 2024, compared to an annualized 0.80% and an annualized 11.31%, respectively, for the same period in 2023. The annualized return on average assets and annualized return on average shareholders’ equity were 0.98% and 12.00%, respectively, for the first nine months of 2024, compared to 0.87% and 12.26%, respectively, for the same period in 2023.
Dividends
Cash dividends of $2.4 million or $0.27 per share were declared in the third quarter of 2024, compared to $2.0 million or $0.26 per share in the third quarter of 2023. Cash dividends declared in the first nine months of 2024 were $6.5 million or $0.81 per share, compared to $5.9 million or $0.78 per share in the same period during the prior year. The cash dividend payout percentage was 33.2% for the first nine months of 2024, compared to 36.8% 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 and nine months ended September 30, 2024 and 2023. Table 1 documents ChoiceOne’s average balances and interest income and expense, as well as the average rates earned or paid on assets and liabilities. Table 2 documents the effect on interest income and expense of changes in volume (average balance) and interest rates. These tables are referred to in the discussion of interest income, interest expense and net interest income.
Table 1 – Average Balances and Tax-Equivalent Interest Rates
Three Months Ended September 30,
Average
Interest
Rate
Assets:
Loans (1)(3)(4)(5)
1,460,033
23,262
6.34
1,278,421
17,779
5.52
Taxable securities (2)
681,578
3.25
741,287
5,345
2.86
Nontaxable securities (1)
289,335
1,775
2.44
294,498
1,797
2.42
108,019
5.43
128,704
1,766
5.44
Interest-earning assets
2,538,965
32,073
5.03
2,442,910
26,687
4.33
Noninterest-earning assets
146,225
125,330
2,685,190
2,568,240
Liabilities and Shareholders' Equity:
Interest-bearing demand deposits
916,459
3,111
1.35
856,485
2,885
1.34
Savings deposits
329,613
728
0.88
357,687
462
0.51
Certificates of deposit
388,183
4,296
4.40
336,419
3,308
3.90
Brokered deposit
17,227
5.25
44,868
582
5.15
2,508
4.75
181,739
2,171
4.74
35,658
413
4.61
35,413
4.62
11,756
159
5.37
20,480
257
4.97
Interest-bearing liabilities
1,908,896
2.38
1,833,091
2.18
Demand deposits
519,511
540,497
Other noninterest-bearing liabilities
18,908
13,433
2,447,315
2,387,021
Shareholders' equity
237,875
181,219
Total liabilities and shareholders' equity
Net interest income (tax-equivalent basis) (Non-GAAP) (1)
20,631
16,609
Net interest margin (tax-equivalent basis) (Non-GAAP) (1)
3.23
2.70
Reconciliation to Reported Net Interest Income
Adjustment for taxable equivalent interest
(383
Net interest income (GAAP)
Net interest margin (GAAP)
3.17
2.64
44
Nine Months Ended September 30,
1,436,277
66,051
6.14
1,233,463
48,655
5.26
695,984
3.14
753,490
2.77
290,404
5,347
296,453
5,372
84,209
5.47
63,478
2,514
5.28
2,506,874
91,231
4.86
2,346,884
72,178
4.10
143,570
114,474
2,650,444
2,461,358
892,174
9,609
1.44
848,964
6,362
333,707
2,019
378,939
0.38
385,823
12,742
4.41
290,136
6,813
3.13
29,347
1,095
4.98
35,887
1,315
4.89
211,606
7,511
130,133
4,597
4.71
35,597
1,237
4.64
35,352
1,222
18,835
5.39
7,934
302
5.07
1,907,089
2.45
1,727,345
21,691
1.67
514,019
546,983
11,946
13,392
2,433,054
2,287,720
217,390
173,638
56,258
50,487
3.00
2.87
(1,165
(1,158
2.94
2.80
Table 2 – Changes in Tax-Equivalent Net Interest Income
2024 Over 2023
Volume
Increase (decrease) in interest income (1)
Loans (2)
5,483
2,683
2,800
Taxable securities
218
(2,060
2,278
Nontaxable securities (2)
(95
(288
(5
Net change in interest income
5,386
240
5,146
Increase (decrease) in interest expense (1)
(232
498
988
538
450
(355
(428
337
(6
(98
(221
123
Net change in interest expense
1,364
1,166
Net change in tax-equivalent net interest income
4,022
3,980
17,396
9,853
7,543
745
(1,497
2,242
(25
(125
100
937
864
19,053
9,095
9,958
3,247
2,812
939
(185
1,124
5,929
3,070
2,859
(251
2,914
2,891
458
443
13,282
6,412
6,870
5,771
3,088
47
Net Interest Income
Tax-equivalent net interest income increased $4.0 million and $5.8 million in the three and nine months ended September 30, 2024, compared to the same periods in 2023. The primary factor contributing to the increase in interest income was the higher interest rates on new loans and the impact of fixed rate swaps (see note 8). Tax equivalent net interest margin increased 53 basis points and 13 basis points in the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023. GAAP based net interest margin increased 53 basis points and 14 basis points in the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023.
The following table presents the annualized cost of deposits and the annualized cost of funds for the three and nine months ended September 30, 2024 and 2023.
Three Months Ended June 30,
Nine Months Ended June 30,
Cost of deposits
1.53
1.36
1.58
0.99
Cost of funds
1.87
1.70
1.93
1.27
ChoiceOne has experienced loan growth, leading to an increase in interest income from loans of $5.5 million and $17.4 million in the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year. Average loans grew $181.6 million and $202.8 million in the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year. In addition, the average rate earned on loans increased 82 basis points and 88 basis points in the three and nine months ended September 30, 2024, respectively, compared to the same period in the prior year. Interest income on loans for the three and nine months ended September 30, 2024 increased by $673,000 and $1.3 million, respectively, compared to the same periods in 2023, due to amortization expense related to the March 2023 sale of the pay floating swap derivative and a decline in accretion income related to acquired loans of $87,000 and $333,000, respectively.
The average balance of total securities decreased $64.9 million and $63.6 million for the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year. The decrease is due to paydowns and a decline in the fair value of available for sale securities. The average rate earned on securities increased 25 basis points and 27 basis points for the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year. Interest income on securities increased by $196,000 and $719,000 for the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year.
Interest expense increased $1.4 million in the three months ended September 30, 2024 and increased $13.3 million in the nine months ended September 30, 2024, compared to the same periods in the prior year. The average rate paid on interest bearing-demand deposits and savings deposits increased 13 basis points and 46 basis points in the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year. This was partly due to an increase in the average balance of interest bearing-demand deposits and savings deposits of $31.9 million for the three months ended September 30, 2024 and offset by the decline in the average balance of interest bearing-demand deposits and savings deposits of $2.0 million for the nine months ended September 30, 2024, compared to the same time periods in the prior year. The increase in the average balance of certificates of deposit of $51.8 million and $95.7 million in the three and nine months ended September 30, 2024, respectively, combined with a 50 basis point and 128 basis point increase in the rate paid on certificates of deposits in the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year, led to an increase in interest expense of $988,000 and $5.9 million during the respective time periods.
In order to bolster liquidity, ChoiceOne borrowed a total of $170.0 million from the Bank Term Funding Program ("BTFP") during the second and fourth quarters of 2023 and held $6.6 million in brokered deposits and $40.0 million in FHLB advances on September 30, 2024. The net effect of these additional borrowed funds and brokered deposits was neutral to interest expense for the three months ended September 30, 2024 and an increase in interest expense of $2.7 million for the nine months ended September 30, 2024, compared to the same periods in 2023.
In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. In addition, ChoiceOne holds certain subordinated debentures issued in connection with a trust preferred securities offering that were obtained as part of the merger with Community Shores. The average balance of subordinated debentures was flat in the third quarter of 2024 and the nine months ended September 30, 2024, compared to the same periods in the prior year.
48
Provision and Allowance for Credit Losses
The allowance for credit losses ("ACL") consists of general and specific components. The general component covers loans collectively evaluated for credit loss 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 determination of our loss factors is based, in part, upon benchmark peer loss history adjusted for qualitative factors that, in management's judgment, affect the collectability of the portfolio as of the analysis date. ChoiceOne's lookback period of benchmark peer net charge-off history was from January 1, 2004 through December 31, 2019 for this analysis.
Loans individually evaluated for credit losses increased by $656,000 to $2.7 million during the first nine months of 2024, and the ACL related to these individually evaluated loans increased by $28,000 during the same period.
Nonperforming loans, which includes Other Real Estate Owned ("OREO") but excludes performing troubled loan modifications ("TLM"), remained low at $2.9 million as of September 30, 2024, compared to $1.9 million as of December 31, 2023, and $1.8 million as of September 30, 2023. The ACL was 1.10% of total loans, excluding loans held for sale, at September 30, 2024, compared to 1.11% on December 31, 2023, and 1.14% on September 30, 2023. The liability for expected credit losses on unfunded loans and other commitments was $1.5 million on September 30, 2024, compared to $2.2 million on December 31, 2023, and $2.7 million on September 30, 2023.
Charge-offs and recoveries for respective loan categories for the nine months ended September 30, 2024 and 2023 were as follows:
616
432
640
532
Net charge-offs were $295,000 during the first nine months of 2024, compared to net charge-offs of $244,000 during the same period in 2023. Net charge-offs for checking accounts during the first nine months of 2024 were $155,000 or an annualized $206,000 compared to $178,000 or an annualized $238,000 for the same period in the prior year. Annualized net loan charge-offs as a percentage of average loans were 0.02% for the third quarter of 2024 compared to 0.05% for the same period in the prior year.
The provision for credit losses on loans was $1.1 million during the first nine months of 2024, compared to $332,000 in the same period in the prior year. The provision expense was deemed necessary due to growth in total loans held for investment of $93.3 million during the first nine months of 2024 and minor deteriorations in the forecast used in ChoiceOne's CECL model.
The loan provision expense was offset by the decrease in unfunded commitments provision expense of $675,000 in the first nine months of 2024, due to changes in mix, historical average funding rate declines, and a decline in balance. Total unfunded commitments decreased $28.7 million in the first nine months of 2024 compared to December 31, 2023.
Net provision for credit losses was $425,000 for the third quarter and first nine months of 2024.
Noninterest Income
Noninterest income increased $1.2 million and $2.1 million in the three and nine months ended September 30, 2024, compared to the same periods in the prior year. The increase was largely due to an increase in customer service charges of $391,000 and $920,000 in the three and nine months ended September 30, 2024 and changes in the market value of equity securities in the three and nine months ended September 30, 2024, compared to the same periods in the prior year. Equity securities include community bank stocks and CRA
focused bond mutual funds. In addition, ChoiceOne recognized earnings on a bank owned life insurance death benefit claim in the amount of $196,000 during the first quarter of 2024.
Noninterest Expense
Noninterest expense increased by $1.7 million or 12.3% and $2.1 million or 5.0% in the three and nine months ended September 30, 2024 compared to the same periods in 2023. The increase in total noninterest expense was due in part to merger related expenses of $645,000 during the third quarter 2024 compared to $0 in the prior year. Additionally, there was an increase to employee health insurance and other benefit costs, and an increase to FDIC insurance and other costs related to inflationary pressures. The year to date increase in costs were offset by a decline in occupancy and equipment related to two branch closures during the first quarter of 2024. Management continues to seek out ways to manage costs, but also recognizes the value of investing in innovation and attracting the best talent in our industry to compete effectively in our markets.
Income Tax Expense
Income tax expense was $1.9 million and $4.7 million in the three and nine months ended September 30, 2024, respectively, compared to $1.1 million and $3.2 million for the same periods in 2023. The effective tax rate was 20.8% and 19.4% for the three and nine months ended September 30, 2024, respectively, compared to 17.4% and 16.5% for the same periods in 2023. During the first nine months of 2024, disallowed interest expense and non deductible merger expenses increased compared to the same period in 2023.
FINANCIAL CONDITION
At September 30, 2024, ChoiceOne had consolidated total assets of $2.7 billion, net loans of $1.5 billion, total deposits of $2.2 billion and total shareholders' equity of $247.7 million.
Total available for sale securities on September 30, 2024 were $497.6 million compared to $514.6 million on December 31, 2023, with the decrease caused by $25.1 million of principal repayments, calls and maturities. The unrealized loss on securities available for sale declined by $17.0 million in the first nine months of 2024. Total held to maturity securities on September 30, 2024 were $392.0 million compared to $408.0 million on December 31, 2023. ChoiceOne's held to maturity securities declined during the first nine months of 2024 due to $16.0 million of principal repayments, calls and maturities.
At September 30, 2024, ChoiceOne had $107.7 million in unrealized losses on its investment securities, including $61.4 million in unrealized losses on available for sale securities, $46.1 million in unrealized losses on held to maturity securities, and $214,000 in unrealized losses on equity securities. Unrealized losses on corporate and municipal bonds have not been recognized into income because management believes the issuers are of high credit quality, and management does not intend to sell prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bonds approach maturity.
ChoiceOne utilizes interest rate derivatives as part of its asset liability management strategy to help manage its interest rate risk position. In order to hedge the risk of rising rates and unrealized losses on securities resulting from the rising rates, ChoiceOne currently holds pay fixed, receive variable interest rate swaps with a total notional value of $401.0 million. These derivative instruments increase in value as long-term interest rates rise, which partially offsets the reduction in shareholders' equity due to unrealized losses on securities available for sale. Refer to Note 8 - Derivatives and Hedging Activities of the consolidated financial statements for more discussion on ChoiceOne’s derivative position.
Equity securities included a money market preferred security ("MMP") of $1.0 million and common stock of $6.8 million as of September 30, 2024. As of December 31, 2023, equity securities included a MMP of $1.0 million and common stock of $6.5 million.
Per U.S. generally accepted accounting principles, unrealized gains or losses on securities available for sale are reflected on the balance sheet in accumulated other comprehensive income (loss), while unrealized gains or losses on securities held to maturity are not reflected on the balance sheet.
The company's loan portfolio by call report code was as follows:
Call Report Codes
Construction & Development Loans
1A2
61,260
4.1
112,877
8.0
1-4 Family Loans
1A1, 1C1, 1C2A, 1C2B
372,401
24.8
347,036
24.6
Multifamily Loans
1D
84,480
5.6
56,563
4.0
Owner Occupied CRE Loans
1E1
303,650
20.2
281,515
20.0
Non-Owner Occupied CRE Loans
1E2
373,562
298,265
21.1
Commercial & Industrial Loans
2A2, 4A
219,110
14.5
219,849
15.6
Farm & Agriculture Loans
1B, 3
47,852
3.2
46,515
Consumer & Other Loans
6B, 6C, 6D, 8, 9b2,10B
41,635
2.8
48,033
3.4
Total Loans
Average loan balances increased to $1.46 billion in the third quarter of 2024 compared to $1.36 billion in the fourth quarter of 2023 and $1.28 billion in the third quarter of 2023. Core loans grew organically by $74.2 million or 7.1% on an annualized basis during the first nine months of 2024. Loan growth during the first nine months of 2024 was concentrated in Non-Owner Occupied CRE loans, which grew by $75.3 million. ChoiceOne also saw healthy growth in Multifamily Loans, which grew by $27.9 million, 1-4 Family loans which grew $25.4 million, and Owner Occupied CRE, which grew by $22.1 million. The growth in 1-4 Family loans was largely related to growth in loans to other financial institutions which were $38.5 million as of September 30, 2024, compared to $19.4
million as of December 31, 2023. Loans to other financial institutions is comprised of a warehouse line of credit to facilitate mortgage loan originations and the interest rate fluctuates with the national mortgage market. This balance is short term in nature with an average life of under 30 days. Management believes the short-term structure and low credit risk of this asset is advantageous in the current rate environment. Loan interest including fee income increased $5.5 million and $17.4 million in the three and nine months ended September 30, 2024, respectively, compared to the same time periods in the prior year.
During the first nine months of 2024 and 2023, ChoiceOne recorded accretion income related to acquired loans in the amount of $944,000 and $1.3 million, respectively. Remaining credit and yield mark on acquired loans from the mergers with County Bank Corp. and Community Shores will accrete into income as the acquired loans mature. The remaining yield mark on acquired loans from the mergers with County Bank Corp. and Community Shores totaled $1.6 million as of September 30, 2024.
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 Bank Corp 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.
ChoiceOne engaged a third party valuation firm to assist in performing a quantitative analysis of goodwill as of June 30, 2024 ("the measurement date"). In deriving the fair value of the reporting unit (the Bank), the third-party firm assessed general economic conditions and outlook; industry and market considerations and outlook; the impact of recent events to financial performance; the market price of ChoiceOne’s common stock and other relevant events. In addition, the valuation relied on financial projections through 2029 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 measurement date was greater than its book value and impairment of goodwill was not required. No material changes and no triggering events have occurred that indicated impairment from the measurement date through September 30, 2024.
52
Deposits and Borrowings
Deposits, excluding brokered deposits, increased $102.1 million or an annualized 19.5% in the third quarter of 2024 and $103.0 million or 4.9% compared to December 31, 2023. The increase in deposits in the third quarter was driven by public funds including schools and townships which historically increase in the third quarter of each year due to the timing of tax collection. The increase in deposits compared to December 31, 2023 is a combination of new business and recapture of deposit losses from the prior year. ChoiceOne continues to be proactive in managing its liquidity position by using brokered deposits, the Bank Term Funding Program (“BTFP”), and FHLB advances to ensure ample liquidity.
Uninsured deposits totaled $863.3 million or 39.1% of deposits on September 30, 2024 compared to $769.7 million, or 36.3% of total deposits at December 31, 2023. At September 30, 2024, total available borrowing capacity from all sources was $780.6 million. ChoiceOne can increase its capacity by utilizing unsecured federal fund lines and pledging additional assets, if necessary.
In September 2021, ChoiceOne completed a private placement of $32.5 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. ChoiceOne also holds $3.5 million in subordinated debentures issued in connection with a $4.5 million trust preferred securities offering, which were obtained in the merger with Community Shores, offset by the merger mark-to-market adjustment.
At September 30, 2024, ChoiceOne has borrowed $170 million from the BTFP. This program provides a 1-year term at a fixed rate with the ability to prepay at any time without penalty. The interest rate on the BTFP borrowings as of September 30, 2024 was 4.76% and fixed through January of 2025. Collateral pledged is U.S. Treasuries, agency debt and mortgage-backed securities valued at par. At September 30, 2024, ChoiceOne had $40 million of borrowings from the FHLB with a weighted average rate of 4.58% with maturities through 2026. Total cost of funds increased to an annualized 1.87% in the third quarter of 2024 compared to an annualized 1.70% in the third quarter of 2023.
Shareholders’ equity totaled $247.7 million as of September 30, 2024, up from $195.6 million as of December 31, 2023, due in large part to the $34.5 million in aggregate gross proceeds (before deducting discounts and estimated offering expenses) received in the Common Stock Offering. The additional increase is due to retained earnings and an improvement in accumulated other compressive loss (AOCI) of $6.1 million compared to December 31, 2023. The improvement in AOCI, is due to both the shortening duration and maturing (paydowns) of the securities portfolio, offset by the change in unrealized gain of the pay-fixed swap derivatives. ChoiceOne Bank remains “well-capitalized” with a total risk-based capital ratio of 13.1% as of September 30, 2024, compared to 12.4% on December 31, 2023.
ChoiceOne uses interest rate swaps to manage interest rate exposure to certain fixed rate assets and variable rate liabilities. On September 30, 2024, ChoiceOne had pay-fixed interest rate swaps with a total notional value of $401.0 million, a weighted average coupon of 3.07%, a fair value of $4.4 million and an average remaining contract length of 7 to 8 years. These derivative instruments increase in value as long-term interest rates rise, which offsets the reduction in equity due to unrealized losses on securities available for sale. Included in the total is $200.0 million of forward starting pay-fixed, receive floating interest rate swaps used to hedge interest bearing liabilities. These forward starting swaps pay a fixed coupon of 2.75% while receiving SOFR. Settlements from these swaps amounted to $1.3 million for the third quarter of 2024 and were a contributing factor to the increase in net interest margin during the third quarter of 2024. Fully tax equivalent net interest margin excluding the swaps was 39 basis points lower than tax equivalent net interest margin reported for the third quarter of 2024. In addition to the pay-fixed interest rate swaps, ChoiceOne also employs back-to-back swaps on a commercial loans, with the impact reflected in interest income.
On January 1, 2023, ChoiceOne adopted ASU 2016-13 CECL which caused an increase in the ACL of $7.2 million and booked a liability for expected credit losses on unfunded loans and other commitments of $3.3 million. The increase in the ACL and the cost of the liability resulted in a decrease in the retained earnings account on our Consolidated Balance Sheet equal to the after-tax impact, with the tax impact portion being recorded in deferred taxes in our Consolidated balance Sheet in accordance with FASB guidance. This reduction in retained earnings was offset by first quarter 2023 earnings and recovery of accumulated other comprehensive loss.
Regulatory Capital Requirements
Following is information regarding compliance of ChoiceOne and ChoiceOne Bank with regulatory capital requirements:
Minimum Required
to be Well
Capitalized Under
for Capital
Prompt Corrective
Actual
Adequacy Purposes
Action Regulations
Ratio
ChoiceOne Financial Services Inc.
Total capital (to risk weighted assets)
282,672
15.0
151,003
N/A
Common equity Tier 1 capital (to risk weighted assets)
231,996
12.3
84,939
4.5
Tier 1 capital (to risk weighted assets)
236,496
12.5
113,252
6.0
Tier 1 capital (to average assets)
9.0
105,102
ChoiceOne Bank
246,322
13.1
150,889
188,611
10.0
232,370
84,875
122,597
6.5
113,166
8.9
105,023
131,279
5.0
233,840
13.0
144,441
185,412
10.3
81,248
189,912
10.5
108,331
7.5
101,337
224,095
12.4
144,274
180,342
212,283
11.8
81,154
117,223
108,205
8.4
101,244
126,555
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 September 30, 2024 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 $25.0 million for the nine months ended September 30, 2024 compared to $57.3 million in the same period in 2023. The change was due to the change in proceeds from loan sales and other liabilities, partially offset by other assets in the nine months ended September 30, 2024 compared to the same period in 2023. Net cash used in investing activities was $56.3 million for the nine months ended September 30, 2024 compared to $96.1 million used in the same period in 2023. The change was due to a decrease in net loan originations that led to cash used of $94.1 million in the first nine months of 2024 compared to $120.3 million used in the same period during the prior year. Net maturities, payments and calls of available for sale and held to maturity securities was $41.8 million for the nine months ended September 30, 2024 compared to $32.2 million in the same period in 2023. Net cash provided by financing activities was $122.2 million for the nine months ended September 30, 2024, compared to $139.5 million in the same period in the prior year. ChoiceOne had $86.2 million in deposit growth in the first nine months of 2024 compared to a decrease of $15.2 million in the same period in 2023. ChoiceOne also increased borrowing by $10.0 million in the first nine months of 2024 compared to an increase of $130.0 million in the same period during the prior year.
ChoiceOne's market risk exposure occurs in the form of interest rate risk and liquidity risk. ChoiceOne's business is transacted in U.S. dollars with no foreign exchange risk exposure. Agricultural loans comprise a relatively small portion of ChoiceOne's total assets. Management believes that ChoiceOne's exposure to changes in commodity prices is insignificant.
Liquidity risk deals with ChoiceOne's ability to meet its cash flow requirements. These requirements include depositors desiring to withdraw funds and borrowers seeking credit. Longer-term liquidity needs may be met through core deposit growth, maturities of and cash flows from investment securities, normal loan repayments, advances from the FHLB and the Federal Reserve Bank, brokered certificates of deposit, and income retention. ChoiceOne had $170.0 million in outstanding borrowings from the BTFP as of September 30, 2024. ChoiceOne had $40.0 million in outstanding borrowings at the FHLB as of September 30, 2024. The acceptance of brokered certificates of deposit is not limited as long as the Bank is categorized as “well capitalized” under regulatory guidelines. At September 30, 2024, total available borrowing capacity from the FHLB and the Federal Reserve Bank was $780.6 million.
ChoiceOne continues to review its liquidity management and has taken steps in an effort to ensure adequacy. These steps include limiting bond purchases in the first nine months of 2024, pledging securities to FHLB and the Federal Reserve Bank in order to increase borrowing capacity and using alternative funding sources such as brokered deposits.
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 Chief Financial Officer, of the effectiveness of the design and operation of ChoiceOne’s disclosure controls and procedures as of September 30, 2024. Based on and as of the time of that evaluation, ChoiceOne’s management, including the Chief Executive Officer and Chief 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 nine months ended September 30, 2024 that has materially affected, or that is reasonably likely to materially affect, ChoiceOne’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There are no material pending legal proceedings to which ChoiceOne or ChoiceOne Bank is a party or to which any of their properties are subject, except for proceedings that arose in the ordinary course of business.
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, 2023 and Item 1A, “Risk Factors,” in ChoiceOne’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2024.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no unregistered sales of equity securities in the third quarter of 2024.
There were no issuer purchases of equity securities during the third quarter of 2024.
Item 5. Other Information
None.
Item 6. Exhibits
The following exhibits are filed or incorporated by reference as part of this report:
ExhibitNumber
Document
2.1
Agreement and Plan of Merger by and between ChoiceOne Financial Services, Inc. and Fentura Financial, Inc. dated July 25, 2024. Previously filed with the Commission on July 25, 2024 in ChoiceOne Financial Services, Inc.’s Current Report on Form 8-K, Exhibit 2.1. Here incorporated by reference.
3.1
Restated Articles of Incorporation of ChoiceOne Financial Services, Inc. Previously filed as an exhibit to ChoiceOne’s Form 10-K Annual Report for the year ended December 31, 2022. Here incorporated by reference.
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.
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.
Form of 3.25% Fixed-to-Floating Rate Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference.
4.3
Form of 3.25% Fixed-to-Floating Rate Global Subordinated Note due September 3, 2031. Previously filed as an exhibit to ChoiceOne Financial Services, Inc.'s Form 8-K filed September 7, 2021. Here incorporated by reference.
31.1
Certification of Chief Executive Officer
31.2
Certification of Chief Financial Officer
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)
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: November 8, 2024
/s/ Kelly J. Potes
Kelly J. PotesChief Executive Officer(Principal Executive Officer)
/s/ Adom J. Greenland
Adom J. GreenlandChief Financial Officer and Treasurer(Principal Financial and Accounting Officer)