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Choiceone Financial Services Inc (COFS) SEC Filing 10-K Annual Report for the fiscal year ending Friday, December 31, 2021

Choiceone Financial Services Inc

CIK: 803164 Ticker: COFS

EXHIBIT 99.1

 

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News Release

ChoiceOne Financial Reports Fourth Quarter and Year End 2021 Results

 

Sparta, Michigan – January 26, 2022

 – ChoiceOne Financial Services, Inc. ("ChoiceOne", NASDAQ:COFS), the parent company for ChoiceOne Bank reported financial results for the quarter and year ended December 31, 2021.

 

Significant items impacting comparable fourth quarter and year end 2021 and 2020 results include the following:

 

 

On July 1, 2020, ChoiceOne completed the merger of Community Shores Bank Corporation, the former parent company of Community Shores Bank, with and into ChoiceOne with ChoiceOne surviving the merger (the "Community Shores Merger").  Community Shores Bank was consolidated with and into ChoiceOne Bank effective October 16, 2020. The total assets, loans and deposits acquired in the Community Shores Merger were $244.0 million, $174.0 million and $227.8 million, respectively.

 

ChoiceOne incurred tax-effected merger-related expenses of $547,000 and $2,714,000, respectively ($0.07 per diluted share and $0.36 per diluted share, respectively), for the quarter and year ended December 31, 2020.  No merger-related expenses were incurred in the year ended December 31, 2021.

 

Financial Highlights

 

 

Net income of $5,012,000 and $22,042,000 for the three and twelve months ended December 31, 2021, compared to $4,100,000 and $15,613,000 during the same periods in 2020.
  Diluted earnings per share of $0.66 and $2.86 during the three and twelve months ended December 31, 2021, compared to $0.52 and $2.07 per share in the same periods in 2020.
  Excluding Paycheck Protection Program ("PPP") loans forgiven during the quarter, held for sale loans, and loans held at other financial institutions, ChoiceOne grew loans organically by $56.6 million during the fourth quarter of 2021.
  During the three and twelve months ended December 31, 2021, $28.1 million and $192.5 million of  PPP loans were forgiven resulting in $1.2 million and $5.2 million of fee income, respectively.  $33.1 million in PPP loans and $1.2 million in deferred PPP fee income remains as of December 31, 2021.
  Total deposits grew by $40.1 million in the fourth quarter of 2021 and $377.7 million during the year ended December 31, 2021.
  ChoiceOne repurchased approximately 85,000 shares for $2.2 million, or a weighted average cost per share of $25.78, during the fourth quarter of 2021. ChoiceOne repurchased approximately 309,000 shares for $7.8 million, or a weighted average cost per share of $25.17 during the year ended December 31, 2021.  These repurchases were part of the common stock repurchase program announced in April 2021 which authorized repurchases of up to 390,114 shares, representing 5% of the total outstanding shares of common stock as of the date the program was adopted.  This program replaced and superseded all prior repurchase programs for ChoiceOne.  Approximately 81,000 shares remain authorized to be repurchased under the program.
  ChoiceOne Bank was named “Best Small Bank” in Michigan by Newsweek for 2022 – the second year in a row ChoiceOne has received this honor.
  ChoiceOne became a limited partner in BankTech Ventures, LP, a venture capital fund focused on emerging financial technology companies.  This investment will help connect us with innovative technology companies focused on community banks.

 

ChoiceOne reported net income of $5,012,000 and $22,042,000 during the three and twelve months ended December 31, 2021, compared to $4,100,000 and $15,613,000 in the same periods in 2020.  Diluted earnings per share were $0.66 and $2.86 during the three and twelve months ended December 31, 2021, compared to $0.52 and $2.07 per share in the same periods in the prior year.  Excluding $547,000 in tax-effected merger related expenses, net income for the fourth quarter of 2020 was $4,647,000 and $0.59 per diluted share.  Net income for the year ended December 31, 2020, excluding $2.7 million of tax-effected merger expenses, was $18,327,000 or $2.43 per diluted share.

 

Total assets grew $89.5 million and total deposits grew $40.1 million from September 30, 2021 to December 31, 2021.  Total assets grew $447.3 million in the twelve months ended December 31, 2021, while deposit growth during the twelve months ended December 31, 2021 was $377.7 million.  Despite the large increase in deposits, ChoiceOne has been able to maintain low deposit costs; interest expense from deposits decreased $873,000 during the year ended 2021 compared to the same period in 2020.  Excluding PPP loans forgiven during the quarter, held for sale loans, and loans held at other financial institutions, ChoiceOne grew loans organically by $56.6 million during the fourth quarter of 2021.  During the three and twelve months ended December 31, 2021, $28.1 million and $192.5 million of  PPP loans were forgiven resulting in $1.2 million and $5.2 million of fee income, respectively.  $33.1 million in PPP loans and $1.2 million in deferred PPP fee income remains as of December 31, 2021.  Management expects the remaining PPP loans to be forgiven in the first half of 2022.  

 

During the fourth quarter and year ended December 31, 2021, ChoiceOne recorded accretion income related to acquired loans in the amount of $203,000 and $1.1 million, respectively.  The remaining credit mark on acquired loans from the mergers with County Bank Corp. and Community Shores Bank Corporation totaled $6.8 million as of December 31, 2021.  ChoiceOne had no provision expense for the three months ended December 31, 2021, as management has seen declining deferrals and very few past due loans as the economy gradually recovers from the COVID-19 pandemic.  

 

In an effort to deploy deposit growth, ChoiceOne grew its securities portfolio $71.7 million in the fourth quarter of 2021 and $530.6 million in the year ended December 31, 2021.  Management believes ChoiceOne’s investments are sufficiently short-term to allow for sufficient liquidity to fund continued organic loan growth.  

 

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 used a portion of net proceeds of the private placement to redeem senior debt, fund common stock repurchases, and support bank-level capital ratios.

 

Total noninterest income declined $1.5 million and $3.5 million in the three and twelve months ended December 31, 2021, respectively, compared to the same periods in the prior year.  Total noninterest income in 2020 was bolstered by heightened levels of refinancing activity within ChoiceOne's mortgage portfolio, with gains on sales of loans $3.7 million larger than in 2021.  Customer service charges increased $373,000 and $1.4 million in the three and twelve months ended December 31, 2021, respectively, compared to the same periods in the prior year.  Prior year service charges were depressed by stay-at-home orders during the COVID 19 pandemic.  Current year service charges also included the effect from the merger with Community Shores, which closed on July 1, 2020.  

 

Total noninterest expense increased $2.0 million in the year ended December 31, 2021, compared to the same time period in 2020.  Much of the increase in 2021 was caused by the increase in scale related to the merger with Community Shores.  During 2021, ChoiceOne hired six experienced commercial lenders, opened a loan production office in Wyoming Michigan, and added four experienced members to our wealth management team focused on growing the wealth management and trust business.

 

1

The following information was filed by Choiceone Financial Services Inc (COFS) on Wednesday, January 26, 2022 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-K Annual Report statement of earnings and operation as management may choose to highlight particular information in the press release.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

 

FORM 10-K

 

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

  
 

For the fiscal year ended December 31, 2021

  

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

  
 

For the transition period from__________________ to __________________

 

Commission File Number:  000-19202

 

ChoiceOne Financial Services, Inc.
(Exact Name of Registrant as Specified in its Charter)

 

Michigan
(State or Other Jurisdiction of
Incorporation or Organization)

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

  

109 East Division Street, Sparta, Michigan
(Address of Principal Executive Offices)

49345
(Zip Code)

 

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

 

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

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common stock

COFS

NASDAQ Capital Market

 

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

 

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

 

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

 

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

Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

 

Emerging growth company

Smaller reporting company

 

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

 

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

 

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

 

As of June 30, 2021, the aggregate market value of common stock held by non-affiliates of the Registrant was $166.6 million. This amount is based on an average bid price of $24.22 per share for the Registrant's stock as of such date.

 

As of February 28, 2022, the Registrant had 7,516,017 shares of common stock outstanding.

  

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the definitive Proxy Statement of ChoiceOne Financial Services, Inc. for the Annual Meeting of Shareholders to be held on May 25, 2022 are incorporated by reference into Part III of this Form 10-K.

 

1

 

 

ChoiceOne Financial Services, Inc.

Form 10-K ANNUAL REPORT

 

Contents

 

 

   

Page

PART 1 

   

Item 1: 

Business

4

Item 1A: 

Risk Factors

12

Item 1B: 

Unresolved Staff Comments 

17

Item 2: 

Properties

17

Item 3: 

Legal Proceedings

17

Item 4: 

Mine Safety Disclosures

17

     

PART II

   

Item 5: 

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

18

Item 6: 

Reserved

18

Item 7: 

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

19

Item 7A:

Quantitative and Qualitative Disclosures About Market Risk

32

Item 8: 

Financial Statements and Supplementary Data

34

Item 9: 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

71

Item 9A: 

Controls and Procedures

71

Item 9B: 

Other Information

71

Item 9C:

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

71

     

PART III

   

Item 10: 

Directors, Executive Officers and Corporate Governance

72

Item 11: 

Executive Compensation

72

Item 12: 

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

72

Item 13: 

Certain Relationships and Related Transactions, and Director Independence

73

Item 14: 

Principal Accountant Fees and Services

73

     

PART IV

   

Item 15: 

Exhibits and Financial Statement Schedules

73

     

SIGNATURES

 

75

 


 

 

2

 

 

FORWARD-LOOKING STATEMENTS

 

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

 

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

 

 

PART I

 

Explanatory Note

 

On July 1, 2020, ChoiceOne Financial Services, Inc. (“ChoiceOne” or the “Company”) completed the merger of Community Shores Bank Corporation ("Community Shores") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2020 and December 31, 2021 include the impact of the merger, which was effective as of July 1, 2020. 

 

On October 1, 2019, ChoiceOne completed the merger of County Bank Corp. ("County") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2019, December 31, 2020, and December 31, 2021 include the impact of the merger, which was effective as of October 1, 2019.

 

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

 

3

 

Item 1.

Business

 

General

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

 

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

 

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

 

At December 31, 2021, the Company had consolidated total assets of $2.4 billion, net loans of $1.0 billion, total deposits of $2.1 billion and total shareholders' equity of $221.7 million. For the year ended December 31, 2021, the Company recognized consolidated net income of $22.0 million. The principal source of revenue for the Company and the Bank is interest and fees on loans. On a consolidated basis, interest and fees on loans accounted for 58%, 60%, and 64% of total revenues in 2021, 2020, and 2019, respectively. Interest on securities accounted for 19%, 11%, and 13% of total revenues in 2021, 2020, and 2019, respectively. For more information about the Company's financial condition and results of operations, see the consolidated financial statements and related notes included in Item 8 of this report.

 

The information under the heading “The Coronavirus (COVID-19) Outbreak” in Item 7 below is incorporated herein by reference.

 

Competition

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

 

4

 

Supervision and Regulation

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

 

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

 

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

 

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

 

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

 

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

 

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

 

5

 

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

 

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

 

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

 

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

 

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

 

In order for the Company to maintain financial holding company status, both the Company and the Bank must be categorized as "well-capitalized" and "well-managed" under applicable regulatory guidelines. If the Company or the Bank ceases to meet these requirements, the Federal Reserve Board may impose corrective capital and/or managerial requirements and place limitations on the Company’s ability to conduct the broader financial activities permissible for financial holding companies. In addition, if the deficiencies persist, the Federal Reserve Board may require the Company to divest of the Bank. The Company and the Bank were each categorized as "well-capitalized" and "well-managed" as of December 31, 2021.

 

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

 

6

 

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

 

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

 

Effects of Compliance With Environmental Regulations

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

 

Employees

As of February 28, 2022, the Company, on a consolidated basis, employed 386 employees, of which 320 were full-time employees.  Our employees are not represented by any collective bargaining group. Management considers its employee relations to be good. 

 

Statistical Information

Additional statistical information describing the business of the Company appears on the following pages and in Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this report and in the Consolidated Financial Statements and the notes thereto in Item 8 of this report. The following statistical information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and notes in this report.  Average balances used in statistical information are calculated using daily averages, unless otherwise specified.

 

 

7

 

The Company did not hold investment securities from any one issuer at December 31, 2021, that were greater than 10% of the Company's shareholders' equity, exclusive of U.S. Government and U.S. Government agency securities.

 

Presented below is the fair value of securities as of December 31, 2021 and 2020, a schedule of maturities of securities as of December 31, 2021, and the weighted average yields of securities as of December 31, 2021.  Callable securities in the money are presumed called and matured at the callable date.

 

   

Securities maturing within:

                 
                                   

Fair Value

   

Fair Value

 
   

Less than

   

1 Year -

   

5 Years -

   

More than

   

at Dec. 31,

   

at Dec. 31,

 

(Dollars in thousands)

 

1 Year

   

5 Years

   

10 Years

   

10 Years

   

2021

   

2020

 
                                                 

U.S. Government and federal agency

  $ 2,008     $ -     $ -     $ -     $ 2,008     $ 2,051  

U.S. Treasury notes and bonds

    2,021       -       89,958       -       91,979       2,056  

State and municipal (1)

    20,776       42,569       366,634       104,868       534,847       320,368  

Corporate

    505       1,769       14,369       3,999       20,642       3,589  

Asset-backed securities

    -       6,641       9,653       -       16,294       -  

Total debt securities

    25,310       50,979       480,614       108,867       665,770       328,064  
                                                 

Mortgage-backed securities

    18,315       113,991       291,088       9,721       433,115       246,723  

Equity securities (2)

    -       1,000       -       7,492       8,492       2,896  

Total

  $ 43,625     $ 165,970     $ 771,702     $ 126,080     $ 1,107,377     $ 577,683  

 

   

Weighted average yields:

 
   

Less than

   

1 Year -

   

5 Years -

   

More than

         
   

1 Year

   

5 Years

   

10 Years

   

10 Years

   

Total

 

U.S. Government and federal agency

    1.98

%

    -

%

    -

%

    -

%

    1.98

%

U.S. Treasury notes and bonds

    1.85       -       1.16       -       1.18  

State and municipal (1)

    2.71       2.95       2.50       2.31       2.51  

Corporate

    2.50       3.70       2.93       3.25       3.04  

Asset-backed securities

    -       0.60       0.84       -       0.74  

Mortgage-backed securities

    1.56       1.88       1.44       1.79       1.57  

Equity securities (2)

    -       4.61       -       -       0.54  

 

(1) The yield is computed for tax-exempt securities on a fully tax-equivalent basis at an incremental tax rate of 21% for 2021.

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

 

Weighted average yields are based on the fair value of securities which are denoted in the table above.  Callable securities in the money are presumed called and matured at the callable date.

 

8

 

 

Maturities and Sensitivities of Loans to Changes in Interest Rates

The following schedule presents the maturities of loans as of December 31, 2021. Loans are also classified according to the sensitivity to changes in interest rates as of December 31, 2021.

 

(Dollars in thousands)

 

In one year

   

After one year

   

After five years

   

After fifteen

         
   

or less

   

through five years

   

through fifteen years

   

years

   

Total

 
                                         

Agricultural

  $ 12,350     $ 29,426     $ 18,493     $ 4,550     $ 64,819  

Commercial and industrial

    47,704       98,651       56,183       486       203,024  

Commercial real estate

    39,844       256,366       220,123       9,551       525,884  

Construction real estate

    18,245       212       -       609       19,066  

Consumer

    1,244       18,099       15,542       289       35,174  

Residential real estate

    2,535       10,138       82,552       73,656       168,881  

Totals

  $ 121,922     $ 412,892     $ 392,893     $ 89,141     $ 1,016,848  

 

(Dollars in thousands)

 

Fixed or

   

Floating or

         
   

predetermined rates

   

variable rates

   

Total

 

Loans maturing after one year:

                       

Agricultural

  $ 35,713     $ 16,756     $ 52,469  

Commercial and industrial

    133,803       21,516       155,319  

Commercial real estate

    396,942       89,098       486,040  

Construction real estate

    821       -       821  

Consumer

    33,511       420       33,931  

Residential real estate

    91,501       74,845       166,346  

Totals

  $ 692,291     $ 202,635     $ 894,926  

 

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

 

9

 

The following table reflects the composition of our allowance for loan loss, non-accrual loans, and nonperforming loans as a percentage of total loans represented by each class of loans as of the dates indicated:

(Dollars in thousands)

 

Agricultural

   

Commercial and industrial

   

Consumer

   

Commercial real estate

   

Construction real estate

   

Residential real estate

 

Loans

                                               

December 31, 2021

  $ 64,819     $ 203,024     $ 35,174     $ 525,884     $ 19,066     $ 168,881  
                                                 

Allowance for loan losses year ended December 31, 2021

  $ 448     $ 1,454     $ 290     $ 3,705     $ 110     $ 671  

Allowance as a percentage of loan category

    0.69 %     0.72 %     0.82 %     0.70 %     0.58 %     0.40 %
                                                 

Nonaccrual loans year ended December 31, 2021

  $ 313     $ 285     $ -     $ 279     $ -     $ 850  

Nonaccrual as a percentage of loan category

    0.48 %     0.14 %     0.00 %     0.05 %     0.00 %     0.50 %
                                                 

Nonperforming loans year ended December 31, 2021

  $ 2,117     $ 358     $ -     $ 880     $ -     $ 2,189  

Nonperforming loans as a percentage of loan category

    3.27 %     0.18 %     0.00 %     0.17 %     0.00 %     1.30 %
                                                 
                                                 

(Dollars in thousands)

 

Agricultural

   

Commercial and industrial

   

Consumer

   

Commercial real estate

   

Construction real estate

   

Residential real estate

 

Loans

                                               

December 31, 2020

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

Allowance for loan losses year ended December 31, 2020

  $ 257     $ 1,327     $ 317     $ 4,178     $ 97     $ 1,300  

Allowance as a percentage of loan category

    0.48 %     0.44 %     0.93 %     0.89 %     0.58 %     0.68 %
                                                 

Nonaccrual loans year ended December 31, 2020

  $ 348     $ 1,802     $ 8     $ 3,088     $ 80     $ 1,381  

Nonaccrual as a percentage of loan category

    0.65 %     0.59 %     0.02 %     0.66 %     0.48 %     0.72 %
                                                 

Nonperforming loans year ended December 31, 2020

  $ 348     $ 1,802     $ 8     $ 3,284     $ 80     $ 2,722  

Nonperforming loans as a percentage of loan category

    0.65 %     0.59 %     0.02 %     0.70 %     0.48 %     1.41 %

 

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

 

10

 

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

 

(Dollars in thousands)

 

2021

   

2020

   

2019

 

Agricultural

  $ 448     $ 257     $ 471  

Commercial and industrial

    1,454       1,327       655  

Consumer

    290       317       270  

Real estate - commercial

    3,705       4,178       1,663  

Real estate - construction

    110       97       76  

Real estate - residential

    671       1,300       640  

Unallocated

    1,010       117       282  

Total Allowance

  $ 7,688     $ 7,593     $ 4,057  

 

Management periodically reviews the assumptions, loss ratios and delinquency trends in estimating the appropriate level of its allowance for loan losses and believes the unallocated portion of the total allowance was sufficient at December 31, 2021.

 

Deposits

The following schedule presents the average deposit balances by category and the average rates paid thereon for the respective years:

 

(Dollars in thousands)

                                               
   

2021

   

2020

   

2019

 
      Average Balance       Average Rate       Average Balance       Average Rate       Average Balance       Average Rate  

Noninterest-bearing demand

  $ 527,876       -

%

  $ 398,422       -

%

  $ 186,411       -

%

Interest-bearing demand and money market deposits

    791,886       0.23       571,693       0.32       278,444       0.56  

Savings

    398,969       0.14       267,217       0.11       109,028       0.07  

Certificates of deposit

    186,898       0.51       183,836       1.11       136,537       1.87  

Total

  $ 1,905,629       0.17

%

  $ 1,421,168       0.29

%

  $ 710,420       0.63

%

 

 

At December 31, 2021, the aggregate balance of time deposits exceeding the FDIC insured limit of $250,000 totaled $87.3 million.  At December 31, 2021, 93% of uninsured time deposit accounts were scheduled to mature within one year.  The maturity profile of uninsured time deposits at December 31, 2021 is as follows:

 

Amount of time deposits in uninsured accounts (Dollars in thousands)

       

Maturing in less than 3 months

  $ 29,498  

Maturing in 3 to 6 months

    34,891  

Maturing in 6 to 12 months

    13,607  

Maturing in more than 12 months

    9,347  

Total uninsured time deposits

  $ 87,343  

 

At December 31, 2021, the aggregate balance of all deposits exceeding the FDIC insured limit of $250,000 totaled $889.2 million, compared to $583.7 million and $323.8 million in 2020 and 2019, respectively. 

 

At December 31, 2021, the Bank had no material foreign deposits.

 

11

 

Return on Equity and Assets

The following schedule presents certain financial ratios of the Company for the years ended December 31:

 

   

2021

   

2020

   

2019

 

Return on assets (net income divided by average total assets)

    1.02

%

    0.94

%

    0.85

%

                         

Return on equity (net income divided by average equity)

    9.79

%

    7.28

%

    6.48

%

                         

Dividend payout ratio (dividends declared per share divided by net income per share)

    32.67

%

    39.54

%

    80.97

%

                         

Equity to assets ratio (average equity divided by average total assets)

    10.44

%

    12.97

%

    13.08

%

 

Item 1A. Risk Factors

 

The Company is subject to many risks and uncertainties. Although the Company seeks ways to manage these risks and develop programs to control risks to the extent that management can control them, the Company cannot predict the future. Actual results may differ materially from management’s expectations. Some of these significant risks and uncertainties are discussed below. The risks and uncertainties described below are not the only ones that the Company faces. Additional risks and uncertainties of which the Company is unaware, or that it currently does not consider to be material, also may become important factors that affect the Company and its business. If any of these risks were to occur, the Company’s business, financial condition or results of operations could be materially and adversely affected.

 

Risks Related to the Companys Business 

 

The continuing COVID-19 pandemic could adversely impact the Companys and its customers business, financial condition, and results of operations.

 

The continuing COVID-19 pandemic is significantly disrupting the economy, financial markets, and societal norms in Michigan, the United States and across the world.  Due to the nature of the pandemic, uncertainty and fluidity of the spread of the virus and its multiple variants, volatility of financial markets, and varied responses and actions from local, state and federal governments, including mandated shutdowns and other restrictive orders, it is impossible to predict the ultimate adverse impact COVID-19 could have on the Company and its customers.  The effects of COVID-19 could, among other risks, result in a material increase in requests from the Company’s customers for loan deferrals, modifications to the terms of loans, or other borrower accommodations; have a material adverse impact on the financial condition of the Company’s customers, potentially impacting their ability to make payments to the Company as scheduled and driving an increase in delinquencies and loan losses; result in additional material provision for loan losses; result in a decreased demand for the Company’s loans; or negatively impact the Company’s ability to access capital on attractive terms or at all.  Those effects could have a material adverse impact on the Company’s and its customers’ business, financial condition, and results of operations.

 

Asset quality could be less favorable than expected.

 

A significant source of risk for the Company arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loan agreements. Most loans originated by the Company are secured, but some loans are unsecured depending on the nature of the loan. With respect to secured loans, the collateral securing the repayment of these loans includes a wide variety of real and personal property that may be insufficient to cover the obligations owed under such loans. Collateral values may be adversely affected by changes in prevailing economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, terrorist activity, environmental contamination and other external events.

 

The Company’s allowance for loan losses may not be adequate to cover actual loan losses.

 

The risk of nonpayment of loans is inherent in all lending activities and nonpayment of loans may have a material adverse effect on the Company’s earnings and overall financial condition, and the value of its common stock. The Company makes various assumptions and judgments about the collectability of its loan portfolio and provides an allowance for potential losses based on a number of factors. If its assumptions are wrong, the allowance for loan losses may not be sufficient to cover losses, which could have an adverse effect on the Company’s operating results and may cause it to increase the allowance in the future. The actual amount of future provisions for loan losses cannot now be determined and may exceed the amounts of past provisions for loan losses. Federal and state banking regulators, as an integral part of their supervisory function, periodically review the allowance for loan losses. These regulatory agencies may require the Company to increase its provision for loan losses or to recognize further loan charge-offs based upon their judgments, which may be different from the Company’s judgments. Any increase in the allowance for loan losses could have a negative effect on the Company’s regulatory capital ratios, net income, financial condition and results of operations. In addition, a large portion of the loan portfolio was marked to fair value as part of the mergers with County and Community Shores and does not carry an allowance as management determined no credit deterioration had occurred since the effective date of the merger.

 

12

 

General economic conditions in the state of Michigan could be less favorable than expected.

 

The Company is affected by general economic conditions in the United States, although most directly within Michigan. An economic downturn within Michigan could negatively impact household and corporate incomes. This impact may lead to decreased demand for both loan and deposit products and increase the number of customers who fail to pay interest or principal on their loans.

 

The Company could be adversely affected by the soundness of other financial institutions, including defaults by larger financial institutions.

 

The Company's ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of credit, trading, clearing, counterparty or other relationships between financial institutions. The Company has exposure to multiple counterparties, and it routinely executes transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by the Company or by other institutions. This is sometimes referred to as "systemic risk" and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, with which the Company interacts on a daily basis, and therefore could adversely affect the Company.

 

If the Company does not adjust to changes in the financial services industry, its financial performance may suffer.

 

The Company’s ability to maintain its financial performance and return on investment to shareholders will depend in part on its ability to maintain and grow its core deposit customer base and expand its financial services to its existing customers. In addition to other banks, competitors include credit unions, securities dealers, brokers, mortgage bankers, investment advisors, internet banks and other financial technology companies, and finance and insurance companies. The increasingly competitive environment is, in part, a result of changes in the economic environment within the state of Michigan, regulation, changes in technology and product delivery systems and consolidation among financial service providers. New competitors may emerge to increase the degree of competition for the Company’s customers and services. Financial services and products are also constantly changing. The Company’s financial performance will also depend in part upon customer demand for the Company’s products and services and the Company’s ability to develop and offer competitive financial products and services.

 

Changes in interest rates could reduce the Company's income and cash flow.

 

The Company’s income and cash flow depends, to a great extent, on the difference between the interest earned on loans and securities, and the interest paid on deposits and other borrowings. Market interest rates are beyond the Company’s control, and they fluctuate in response to general economic conditions and the policies of various governmental and regulatory agencies including, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates and interest rate relationships, will influence the origination of loans, the purchase of investments, the generation of deposits and the rate received on loans and securities and paid on deposits and other borrowings.

 

Interest rates on our outstanding financial instruments might be subject to change based on regulatory developments, which could adversely affect our revenue, expenses, and the value of those financial instruments.

 

LIBOR and certain other “benchmarks” are the subject of recent national, international, and other regulatory guidance and proposals for reform. These reforms may cause such benchmarks to perform differently than in the past or have other consequences which cannot be predicted. On July 27, 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. In November 2020, the FCA announced that it would continue to publish LIBOR rates through June 30, 2023. It is unclear whether, or in what form, LIBOR will continue to exist after that date. Any uncertainty regarding the continued use and reliability of LIBOR as a benchmark interest rate could adversely affect the value of our floating rate obligations, loans, deposits, and other financial instruments tied to LIBOR rates, as well as the revenue and expenses associated with those financial instruments. While, at this time, it appears that consensus is growing around using the Secured Overnight Financing Rate (“SOFR”) as an alternative to LIBOR, it remains to be determined whether this will ultimately be the case and what the impact of a possible transition to SOFR or other alternative reference rates may have on our business, financial results and results of operations.  We could become subject to litigation and other types of disputes as a consequence of the transition from LIBOR to SOFR or another alternative reference rate, which could subject us to increased legal expenses, monetary damages and reputational harm.

 

The Company is subject to liquidity risk in its operations, which could adversely affect its ability to fund various obligations.

 

Liquidity risk is the possibility of being unable to meet obligations as they come due or capitalize on growth opportunities as they arise because of an inability to liquidate assets or obtain adequate funding on a timely basis, at a reasonable cost and within acceptable risk tolerances. Liquidity is required to fund various obligations, including credit obligations to borrowers, loan originations, withdrawals by depositors, repayment of debt, dividends to shareholders, operating expenses and capital expenditures. Liquidity is derived primarily from retail deposit growth and earnings retention, principal and interest payments on loans and investment securities, net cash provided from operations and access to other funding. If the Company is unable to maintain adequate liquidity, then its business, financial condition and results of operations would be negatively affected.

 

13

 

The Company has significant exposure to risks associated with commercial and residential real estate.

 

A substantial portion of the Company’s loan portfolio consists of commercial and residential real estate-related loans, including real estate development, construction and residential and commercial mortgage loans.  As of December 31, 2021, the Company had approximately $545.0 million of commercial and construction real estate loans outstanding, which represented approximately 54% of its loan portfolio.  As of that same date, the Company had approximately $168.9 million in residential real estate loans outstanding, or approximately 17% of its loan portfolio. Consequently, real estate-related credit risks are a significant concern for the Company. The adverse consequences from real estate-related credit risks tend to be cyclical and are often driven by national economic developments that are not controllable or entirely foreseeable by the Company or its borrowers.

 

Commercial loans may expose the Company to greater financial and credit risk than other loans.

 

The Company’s commercial and industrial loan portfolio, including commercial mortgages, was approximately $203.0 million at December 31, 2021, comprising approximately 20% of its total loan portfolio. Commercial loans generally carry larger loan balances and can involve a greater degree of financial and credit risk than other loans. Any significant failure to pay on time by the Company’s customers would hurt the Company’s earnings. The increased financial and credit risk associated with these types of loans are a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the size of loan balances, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans.

 

Legislative or regulatory changes or actions could adversely impact the Company or the businesses in which it is engaged.

 

The Company and the Bank are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of their operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors and the deposit insurance fund, and not to benefit the Company's shareholders. The impact of any changes to laws and regulations or other actions by regulatory agencies may negatively impact the Company or its ability to increase the value of its business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution's allowance for loan losses. Future regulatory changes or accounting pronouncements may increase the Company's regulatory capital requirements or adversely affect its regulatory capital levels. Additionally, actions by regulatory agencies against the Company or the Bank could require the Company to devote significant time and resources to defending its business and may lead to penalties that materially affect the Company.

 

The Company relies heavily on its management and other key personnel, and the loss of any of them may adversely affect its operations.

 

The Company is and will continue to be dependent upon the services of its management team and other key personnel. Losing the services of one or more key members of the Company’s management team could adversely affect its operations.

 

The Companys controls and procedures may fail or be circumvented.

 

Management regularly reviews and updates the Company’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met.  If the Company fails to identify and remediate control deficiencies, it is possible that a material misstatement of interim or annual financial statements will not be prevented or detected on a timely basis.  In addition, any failure or circumvention of the Company’s other controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company’s business, results of operations and financial condition.

 

The Company may be a defendant in a variety of litigation and other actions, which may have a material adverse effect on the Company's financial condition and results of operations.

 

The Company and the Bank are regularly involved in a variety of litigation arising out of the normal course of business. The Company's insurance may not cover all claims that may be asserted against it, and any claims asserted against it, regardless of merit or eventual outcome, may harm its reputation or cause the Company to incur unexpected expenses, which could be material in amount. Should the ultimate expenses, judgments or settlements in any litigation exceed the Company's insurance coverage, they could have a material adverse effect on the Company's financial condition and results of operations. In addition, the Company may not be able to obtain appropriate types or levels of insurance in the future, nor may it be able to obtain adequate replacement policies with acceptable terms, if at all.

 

If the Company cannot raise additional capital when needed, its ability to further expand its operations through organic growth or acquisitions could be materially impaired.

 

The Company is required by federal and state regulatory authorities to maintain specified levels of capital to support its operations. The Company may need to raise additional capital to support its current level of assets or its growth. The Company’s ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside its control, and on its financial performance. The Company cannot assure that it will be able to raise additional capital in the future on terms acceptable to it or at all. If the Company cannot raise additional capital when needed, its ability to maintain its current level of assets or to expand its operations through organic growth or acquisitions could be materially limited.

 

14

 

Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of computer systems or otherwise, could severely harm the Company's business.

 

As part of its business, the Company collects, processes and retains sensitive and confidential client and customer information on behalf of itself and other third parties. Despite the security measures the Company has in place for its facilities and systems, and the security measures of its third party service providers, the Company may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information, whether by the Company or by its vendors, could severely damage the Company's reputation, expose it to the risks of litigation and liability, disrupt the Company's operations and have a material adverse effect on the Company's business.

 

The Company's information systems may experience an interruption or breach in security.

 

The Company relies heavily on communications and information systems to conduct its business and deliver its products. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company's customer relationship management, general ledger, deposit, loan and other systems. While the Company has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches of the Company's information systems or its customers' information or computer systems would not damage the Company's reputation, result in a loss of customer business, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and financial liability, any of which could have a material adverse effect on the Company's financial condition and results of operations.

 

Cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations.

 

Global cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to information technology (IT) systems to sophisticated and targeted measures known as advanced persistent threats, directed at the Company and/or its third party service providers. Although we employ comprehensive measures to prevent, detect, address and mitigate these threats (including access controls, employee training, data encryption, vulnerability assessments, continuous monitoring of our IT networks and systems and maintenance of backup and protective systems), cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. The potential consequences of a material cybersecurity incident include reputational damage, litigation with third parties and increased cybersecurity protection and remediation costs, which in turn could materially adversely affect our results of operations.

 

Environmental liability associated with commercial lending could result in losses.

 

In the course of its business, the Company may acquire, through foreclosure, properties securing loans it has originated or purchased that are in default. Particularly in commercial real estate lending, there is a risk that hazardous substances could be discovered on these properties. In this event, the Company might be required to remove these substances from the affected properties at the Company's sole cost and expense. The cost of this removal could substantially exceed the value of affected properties. The Company may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties. These events could have an adverse effect on the Company's business, results of operations and financial condition.

 

The Company depends upon the accuracy and completeness of information about customers.

 

In deciding whether to extend credit to customers, the Company relies on information provided to it by its customers, including financial statements and other financial information. The Company may also rely on representations of customers as to the accuracy and completeness of that information and on reports of independent auditors on financial statements. The Company's financial condition and results of operations could be negatively impacted to the extent that the Company extends credit in reliance on financial statements that do not comply with generally accepted accounting principles or that are misleading or other information provided by customers that is false or misleading.

 

The Company operates in a highly competitive industry and market area.

 

The Company faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include national and regional banks within the various markets where the Company operates, as well as internet banks and other financial technology companies. The Company also faces competition from many other types of financial institutions, including savings and loan associations, credit unions, finance companies, brokerage firms, insurance companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. The Company competes with these institutions both in attracting deposits and in making new loans. Technology has lowered barriers to entry into the market and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of the Company's competitors have fewer regulatory constraints and may have lower cost structures, such as credit unions that are not subject to federal income tax. Due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than the Company can.

 

Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact the Company's business.

 

Severe weather, natural disasters, acts of war or terrorism, risks posed by an outbreak of a widespread epidemic or pandemic of disease (or widespread fear thereof), including the impact of the COVID-19 pandemic, and other adverse external events could have a significant impact on the Company's ability to conduct business. Such events could affect the stability of the Company's deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses.

 

15

 

The Company relies on dividends from the Bank for most of its revenue.

 

The Company is a separate and distinct legal entity from the Bank. It receives substantially all of its revenue from dividends from the Bank. These dividends are the principal source of funds to pay cash dividends on the Company's common stock. Various federal and/or state laws and regulations limit the amount of dividends that the Bank may pay to the Company. If the Bank is unable to pay dividends to the Company, the Company may not be able to pay cash dividends on its common stock. The earnings of the Bank have been the principal source of funds to pay cash dividends to shareholders. Over the long-term, cash dividends to shareholders are dependent upon earnings, as well as capital requirements, regulatory restraints and other factors affecting the Company and the Bank.

 

Additional risks and uncertainties could have a negative effect on financial performance.

 

Additional factors could have a negative effect on the financial performance of the Company and the Company’s common stock. Some of these factors are financial market conditions, changes in financial accounting and reporting standards, new litigation or changes in existing litigation, regulatory actions and losses.

 

Risks Related to the Companys Common Stock

 

Investments in the Companys common stock involve risk.

 

The market price of the Company’s common stock may fluctuate significantly in response to a number of factors, including:

 

● The impact associated with the COVID-19 pandemic
● Variations in quarterly or annual operating results
● Changes in dividends per share
● Changes in interest rates
● New developments, laws or regulations in the banking industry
● Acquisitions or business combinations involving the Company or its competition
● Regulatory actions, including changes to regulatory capital levels, the components of regulatory capital and how regulatory capital is calculated
● Volatility of stock market prices and volumes
● Changes in market valuations of similar companies
● New litigation or contingencies or changes in existing litigation or contingencies
● Changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies
● Rumors or erroneous information
● Credit and capital availability
● Issuance of additional shares of common stock or other debt or equity securities of the Company

 

The Company's common stock, while publicly traded, has less liquidity than the average liquidity of stocks listed on the Nasdaq Stock Market.

 

The Company's common stock is listed for trading on the Nasdaq Capital Market.  However, the Company's common stock has less liquidity than the average liquidity for companies listed in the Nasdaq Stock Market.  The public trading market for the Company's common stock depends on a marketplace of willing buyers and sellers at any given time, which in turn depends on factors outside of the Company's control, including general economic and market conditions and the decisions of individual investors.  The limited market for the Company's common stock may affect a shareholder's ability to sell their shares at any given time, and the sale of a large number of shares at one time could temporarily adversely affect the market price of our common stock. 

 

The Company's common stock is not insured by any government entity.

 

The Company's common stock is not insured by the FDIC or any other government entity.  Investment in the Company's common stock is subject to risk and potential loss.

 

A shareholder's ownership of common stock may be diluted if the Company issues additional shares of common stock in the future.

 

The Company's articles of incorporation authorize the Company's Board of Directors to issue additional shares of common stock or preferred stock without shareholder approval.  To the extent the Company issues additional shares of common stock or preferred stock, or issues options or warrants permitting the holder to purchase or acquire common stock in the future and such warrants or options are exercised, the Company's shareholders may experience dilution in their ownership of the Company's common stock.  Holders of the Company's common stock do not have any preemptive or similar rights to purchase a pro rata share of any additional shares offered or issued by the Company.

 

16

 

The value of the Company's common stock may be adversely affected if the Company issues debt and equity securities that are senior to the Company's common stock in liquidation or as to distributions.

 

The Company may increase its capital by issuing debt or equity securities or by entering into debt or debt-like financing.  This may include the issuance of common stock, preferred stock, senior notes, or subordinated notes.  Upon any liquidation of the Company, the Company's lenders and holders of its debt securities would be entitled to distribution of the Company's available assets before distributions to the holders of the Company's common stock, and holders of preferred stock may be granted rights to similarly receive a distribution upon liquidation prior to distribution to holders of the Company's common stock.  The Company cannot predict the amount, timing or nature of any future debt financings or stock offerings, and the decision of whether to incur debt or issue securities will depend on market conditions and other factors beyond the Company's control.  Future offerings could dilute a shareholder's interests in the Company or reduce the per-share value of the Company's common stock.

 

The Company's articles of incorporation and bylaws, and certain provisions of Michigan law, contain provisions that could make a takeover effort more difficult.

 

The Michigan Business Corporation Act, and the Company's articles of incorporation and bylaws, include provisions intended to protect shareholders and prohibit, discourage, or delay certain types of hostile takeover activities.  In addition, federal law requires the Federal Reserve Board's prior approval for acquisition of "control" of a bank holding company such as the Company, including acquisition of 10% or more of the Company's outstanding securities by any person not defined as a company under the Bank Holding Company Act of 1956, as amended (the "BHC Act").  These provisions and requirements could discourage potential acquisition proposals, delay or prevent a change in control, diminish the opportunities for a shareholder to participate in tender offers, prevent transactions in which our shareholders might otherwise receive a premium for their shares, or limit the ability for our shareholders to approve transactions that they may believe to be in their best interests.

 

An entity or group holding a certain percentage of the Company's outstanding securities could become subject to regulation as a "bank holding company" or may be required to obtain prior approval of the Federal Reserve Board.

 

Any bank holding company or foreign bank with a presence in the United States may be required to obtain approval of the Federal Reserve Board under the BHC Act to acquire or retain 5% or more of the Company's outstanding securities.  Further, if any entity (including a "group" comprised of individual persons) owns or controls the power to vote 25% or more of the Company's outstanding securities, or 5% or more of the outstanding securities if the entity otherwise exercises a "controlling influence" over the Company, the entity may become subject to regulation as a "bank holding company" under the BHC Act.  An entity that is subject to regulation as a bank holding company would be subject to regulatory and statutory obligations and restrictions, and could be required to divest all or a portion of the entity's investment in the Company's securities or in other investments that are not permitted for a bank holding company.

 

Item 1B.

Unresolved Staff Comments

 

None.

 

Item 2.

Properties

 

The Company’s headquarters are located at 109 East Division, Sparta, Michigan 49345. The headquarters location is owned by the Company and is not subject to any mortgage.

 

32 of the Company’s 36 locations are designed for use and operation as a bank, are well maintained, and are suitable for current operations. The remaining Four locations are comprised of three loan offices and a wealth management center. Banking offices generally range in size from 1,200 to 3,200 square feet, based on the location and number of employees located at the facility. All of our banking offices are owned by the Bank except for 4 that are leased under various operating lease agreements.  The Company’s management believes all offices are adequately covered by property insurance.

 

Item 3.

Legal Proceedings

 

As of December 31, 2021, there were no significant pending legal proceedings to which the Company or the Bank is a party or to which any of their properties were subject, except for legal proceedings arising in the ordinary course of business. In the opinion of management, pending legal proceedings will not have a material adverse effect on the consolidated financial condition of the Company.

 

Item 4.

Mine Safety Disclosures

 

Not applicable.

 

17

 

 

PART II

 

Item 5.

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

 

Stock Information

 

The Company’s common stock is traded on the NASDAQ Capital Market under the symbol COFS.

 

As of February 28, 2022, there were approximately 1,167 owners of record and approximately 1,050 beneficial owners of our common stock.

 

The following table summarizes the quarterly cash dividends declared per share of common stock during 2021 and 2020:

 

   

2021

   

2020

 

First Quarter

  $ 0.22     $ 0.20  

Second Quarter

    0.22       0.20  

Third Quarter

    0.25       0.20  

Fourth Quarter

    0.25       0.22  

Total

  $ 0.94     $ 0.82  

 

ChoiceOne’s principal source of funds to pay cash dividends is the earnings and dividends paid by the Bank. The Bank is restricted in its ability to pay cash dividends under current banking regulations. See Note 20 to the consolidated financial statements for a description of these restrictions. Based on information presently available, management expects ChoiceOne to declare and pay regular quarterly cash dividends in 2021, although the amount of the quarterly dividends will be dependent on market conditions and ChoiceOne’s requirements for cash and capital, among other things.

 

Information regarding the Company’s equity compensation plans may be found in Item 12 of this report and is here incorporated by reference.

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

ChoiceOne repurchased approximately 85,000 shares for $2.2 million, or a weighted average cost per share of $25.78, during the fourth quarter of 2021. ChoiceOne repurchased approximately 309,000 shares for $7.8 million, or a weighted average cost per share of $25.17 during the year ended December 31, 2021.  

 

 

                   

Total Number

   

Maximum

 
                   

of Shares

   

Number of

 
   

Total

           

Purchased as

   

Shares that

 
   

Number

   

Average

   

Part of a

   

May Yet be

 
   

of Shares

   

Price Paid

   

Publicly

   

Purchased

 

Period

 

Purchased

   

per Share

   

Announced Plan

   

Under the Plan

 
                                 

October 1 - October 31, 2021

                               

Employee Transactions

    -     $ -       -          

Repurchase Plan

    20,840     $ 24.94       20,840       146,333  

November 1 - November 30, 2021

                               

Employee Transactions

    -     $ -       -          

Repurchase Plan

    37,715     $ 26.22       37,715       108,618  

December 1 - December 31, 2021

                               

Employee Transactions

    -     $ -       -          

Repurchase Plan

    27,778     $ 25.79       27,778       80,840  

 

As of December 31, 2021, there are approximately 81,000 shares remaining that may yet be purchased under approved plans. The repurchase plan was adopted and announced in April 2021. There was no stated expiration date. The plan authorized the repurchase of up to 390,114 shares, representing 5% of the total outstanding shares of common stock as of the date the plan was adopted.

 

Item 6.

Reserved

 

18

 

Item 7.

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” or the “Company”), and its wholly-owned subsidiaries. This discussion should be read in conjunction with the consolidated financial statements and related footnotes.

 

We have omitted discussion of 2020 results where it would be redundant to the discussion previously included in Part II, Item 7 of our 2020 Annual Report on Form 10-K.

 

Selected Financial Data

 

(Dollars in thousands, except per share data)

                       
   

2021

   

2020

   

2019

 

For the year

                       

Net interest income

  $ 60,641     $ 51,071     $ 27,773  

Provision for loan losses

    416       4,000       -  

Noninterest income

    19,194       22,698       9,168  

Noninterest expense

    52,921       50,884       28,476  

Income before income taxes

    26,498       18,885       8,465  

Income tax expense

    4,456       3,272       1,294  

Net income

    22,042       15,613       7,171  

Cash dividends declared

    7,200       6,174       5,806  
                         

Per share *

                       

Basic earnings

  $ 2.87     $ 2.08     $ 1.58  

Diluted earnings

    2.86       2.07       1.58  

Cash dividends declared

    0.94       0.82       1.40  

Shareholders' equity (at year end)

    29.52       29.15       26.52  
                         

Average for the year

                       

Securities

  $ 869,788     $ 388,797     $ 210,492  

Gross loans

    1,040,430       1,014,959       534,646  

Deposits

    1,905,629       1,421,168       710,419  

Borrowings

    5,465       16,712       21,270  

Subordinated debt

    12,841       1,532       -  

Shareholders' equity

    225,120       214,591       110,610  

Assets

    2,156,774       1,654,873       845,851  
                         

At year end

                       

Securities

  $ 1,116,265     $ 585,687     $ 348,888  

Gross loans

    1,068,831       1,117,798       856,191  

Deposits

    2,052,294       1,674,578       1,154,602  

Borrowings

    50,000       9,327       33,198  

Subordinated debt

    35,017       3,089       -  

Shareholders' equity

    221,669       227,268       192,139  

Assets

    2,366,682       1,919,342       1,386,128  
                         

Selected financial ratios

                       

Return on average assets

    1.02

%

    0.94

%

    0.85

%

Return on average shareholders' equity

    9.79       7.28       6.48  

Cash dividend payout as a percentage of net income

    32.67       39.54       80.97  

Shareholders' equity to assets (at year end)

    9.37       11.84       13.86  

 

Note - 2019 financial data includes the impact of the merger with County, which was effective as of October 1, 2019, and 2020 financial data includes the impact of the merger with Community Shores, which was effective July 1, 2020.

 

19

 

Explanatory Note

 

 

On July 1, 2020, ChoiceOne completed the merger of Community Shores Bank Corporation ("Community Shores") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2020 and December 31, 2021 include the impact of the merger, which was effective as of July 1, 2020. 

On October 1, 2019, ChoiceOne completed the merger of County Bank Corp. ("County") with and into ChoiceOne with ChoiceOne surviving the merger. Accordingly, the reported consolidated financial condition and operating results as of and for the years ended December 31, 2019, December 31, 2020, and December 31, 2021 include the impact of the merger, which was effective as of October 1, 2019.

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

 

RESULTS OF OPERATIONS

 

Summary 

ChoiceOne's net income for 2021 was $22.0 million, compared to $15.6 million in 2020.  Diluted earnings per share was $2.86 during in the twelve months ended December 31, 2021, compared to $2.07 per share in the twelve months ended December 31, 2020.  Net income for the year ended December 31, 2020, excluding $2.7 million of tax-effected merger expenses, was $18.3 million or $2.43 per diluted share.

 

Total assets grew to $2.4 billion as of December 31, 2021 compared to $1.9 billion as of December 31, 2020.  The increase was related to organic deposit growth of $ 377.7 million in the twelve months ended December 31, 2021.  This growth was partly due to how individuals and businesses have managed funds received under the Coronavirus Aid, Relief and Economic Security ("CARES") Act.  In an effort to deploy deposit growth, ChoiceOne grew its securities portfolio $530.6 million in the year ended December 31, 2021.  During the twelve months ended December 31, 2021, $192.5 million of loans under the Paycheck Protection Program ("PPP") were forgiven resulting in $5.2 million of fee income.  This growth in the securities portfolio coupled with PPP fees helped total interest income for 2021 to grow $8.9 million compared to 2020.  2021 interest income on loans included accretion income related to loans acquired from the mergers with County Bank Corp. and Community Shores Bank Corporation in the amount of $1.1 million.  The remaining credit mark on these acquired loans totaled $6.8 million as of December 31, 2021.  Despite the large increase in deposit balances, interest cost of deposits decreased by $873,000 in 2021 compared to 2020.

 

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 used a portion of net proceeds from the private placement to redeem senior debt, fund common stock repurchases, and support bank-level capital ratios.

 

Total noninterest income declined $3.5 million in the twelve months ended December 31, 2021, compared to the twelve months ended December 31, 2020.  Total noninterest income in 2020 was bolstered by heightened levels of refinancing activity within ChoiceOne's mortgage portfolio, with gains on sales of loans $3.7 million higher than in 2021.  Customer service charges increased $1.4 million in the twelve months ended December 31, 2021, compared to the twelve months ended December 31, 2020.  2020 service charges were depressed by stay-at-home orders during the COVID 19 pandemic.  2021 service charges also included the effect from the merger with Community Shores, which closed on July 1, 2020.  

 

Total noninterest expense increased $2.0 million in the year ended December 31, 2021, compared to the year ended December 31, 2020.  Much of the increase in 2021 was caused by the increase in scale related to the merger with Community Shores.

 

20

 

The Coronavirus (COVID-19) Outbreak

 

Consistent with federal banking agencies' “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus,” ChoiceOne is working with its borrowers affected by the COVID-19 pandemic. ChoiceOne granted deferrals on numerous loans to borrowers affected by the pandemic; however, as of June 30, 2021, all deferments had resumed payments in accordance with loan terms.

In addition, ChoiceOne processed over $126 million in PPP loans in 2020 and acquired an additional $37 million in PPP loans in the merger with Community Shores. ChoiceOne originated an additional $89.1 million in PPP loans in 2021. PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. PPP loans carry a fixed rate of 1.00% and a term of two years (loans made before June 5, 2020) or five years (loans made on or after June 5, 2020), if not forgiven in whole or in part. Payments are deferred until either the date on which the Small Business Administration ("SBA") remits the amount of forgiveness proceeds to the lender or the date that is ten months after the last day of the covered period if the borrower does not apply for forgiveness within that ten-month period. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. Upon SBA forgiveness, unrecognized fees are recognized into interest income.  During the year ended December 31, 2021, $192.5 million of PPP loans were forgiven resulting in $5.2 million of fee income compared to $23.4 million of PPP loans forgiven resulting in $3.0 million of fee income in 2020. $33.1 million in PPP loans and $1.2 million in deferred PPP fee income remains outstanding as of December 31, 2021.  Management expects the remaining PPP loans to be forgiven in the first half of 2022.

Dividends

Cash dividends of $7.2 million or $0.94 per common share were declared in 2021 compared to $6.2 million or $0.82 per common share were declared in 2020.  The dividend yield for ChoiceOne’s common stock was 3.55% as of the end of 2021, compared to 2.66% as of the end of 2020. The cash dividend payout as a percentage of net income was 33% as of December 31, 2021, compared to 40% as of December 31, 2020.

 

21

 

Table 1 – Average Balances and Tax-Equivalent Interest Rates

 

   

Year Ended December 31,

 
   

2021

   

2020

   

2019

 

(Dollars in thousands)

 

Average

                   

Average

                   

Average

                 
   

Balance

   

Interest

   

Rate

   

Balance

   

Interest

   

Rate

   

Balance

   

Interest

   

Rate

 

Assets:

                                                                       

Loans (1) (3)(4)(5)

  $ 1,040,430     $ 48,672       4.68

%

  $ 1,014,959     $ 46,893       4.62

%

  $ 534,646     $ 26,791       5.01

%

Taxable securities (2)

    599,902       10,260       1.71       276,085       5,891       2.13       152,094       3,955       2.60  

Nontaxable securities (1)

    269,886       7,098       2.63       112,712       3,402       3.02       58,398       1,867       3.20  

Other

    68,879       84       0.12       71,417       266       0.37       14,992       268       1.79  

Interest-earning assets

    1,979,097       66,114       3.34       1,475,173       56,452       3.83       760,130       32,881       4.33  

Noninterest-earning assets

    177,677                       179,699                       85,721                  

Total assets

  $ 2,156,774                     $ 1,654,873                     $ 845,851                  
                                                                         

Liabilities and Shareholders' Equity:

                                                                       

Interest-bearing demand deposits

  $ 791,886     $ 1,797       0.23

%

  $ 571,693     $ 1,832       0.32

%

  $ 278,444     $ 1,559       0.56

%

Savings deposits

    398,969       551       0.14       267,217       300       0.11       109,028       79       0.07  

Certificates of deposit

    186,898       957       0.51       183,836       2,046       1.11       136,537       2,550       1.87  

Borrowings

    5,465       101       1.86       16,712       327       1.96       21,269       512       2.41  

Subordinated debentures

    12,841       571       4.45       1,532       139       9.07       -       -       0.00  

Interest-bearing liabilities

    1,396,059       3,977       0.28       1,040,990       4,644       0.45       545,278       4,700       0.86  

Demand deposits

    527,876                       398,422                       186,411                  

Other noninterest-bearing liabilities

    7,719                       870                       3,552                  

Total liabilities

    1,931,654                       1,440,282                       735,241                  

Shareholders' equity

    225,120                       214,591                       110,610                  

Total liabilities and shareholders' equity

  $ 2,156,774                     $ 1,654,873                     $ 845,851                  
                                                                         

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

          $ 62,137                     $ 51,808                     $ 28,181          
                                                                         

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

                    3.14

%

                    3.51

%

                    3.71

%

                                                                         

Reconciliation to Reported Net Interest Income

                                                                       

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

          $ 62,137                     $ 51,808                     $ 28,181          

Adjustment for taxable equivalent interest

            (1,513 )                     (737 )                     (408 )        

Net interest income (GAAP)

          $ 60,624                     $ 51,071                     $ 27,773          

Net interest margin (GAAP)

                    3.08

%

                    3.38

%

                    3.47

%

                                                                         

 

(1)

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

(2)

Interest on taxable securities includes dividends on Federal Home Loan Bank and Federal Reserve Bank stock.

(3)

Loans include both loans to other financial institutions and loans held for sale.
(4) Non-accruing loan balances are included in the balance of average loans.
(5) Interest on loans included net origination fees and PPP fees of approximately $7,232,000, $5,236,000, and $866,000 in 2021, 2020, and 2019, respectively.

 

22

 

Table 2 – Changes in Tax-Equivalent Net Interest Income

 

   

Year Ended December 31,

 

(Dollars in thousands)

 

2021 Over 2020

   

2020 Over 2019

 
   

Total

   

Volume

   

Rate

   

Total

   

Volume

   

Rate

 

Increase (decrease) in interest income (1)

                                               

Loans (2)

  $ 1,779     $ 1,187     $ 592     $ 20,102     $ 22,336     $ (2,234 )

Taxable securities

    4,369       5,737       (1,368 )     1,936       2,749       (813 )

Nontaxable securities (2)

    3,696       4,185       (489 )     1,535       1,647       (112 )

Other

    (182 )